A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a timevarying risk premium. This paper presents a mechanism in a simple two-country two-good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a...

We generalize a simple New Keynesian model and show that a flattening of the Phillips curve reduces the size of fiscal multipliers at the zero lower bound (ZLB) on the nominal interest rate. The factors behind the flatting are consistent with micro- and macroeconomic empirical evidence: it is a...

In this paper, we reconsider the question how monetary policy influences exchange rate dynamics. To this end, a vector autoregressive (VAR) model is combined with a two-country dynamic stochastic general equilibrium (DSGE) model. Instead of focusing exclusively on how monetary policy shocks...

We introduce the tractable buffer stock savings setup of Carroll and Toche (2009 NBER Working Paper) into an otherwise conventional New-Keynesian dynamic stochastic general equilibrium model with financial frictions. The introduction of a precautionary saving motive arising from an uninsurable...

We propose a model of a risky mortgage-lending market in which we take explicit account of heterogeneity in household borrowing conditions, by introducing two borrower types: one with a low loan-to-value (LTV) ratio, one with a high LTV ratio, calibrated to U.S. data. We use such framework to...

[Introduction] Boom-bust cycles in asset prices and economic activity are a central issue in policy and academic debates. An increasing rate of default on mortgage loans in the U.S. precipitated the financial crisis of 2007. A large stock of debt and high asset prices have been both a cause and...

We introduce heterogeneity in investors’ ability to borrow from collateral in a Kiyotaki–Moore style macro model, calibrated to the quintiles of the leverage-ratio distribution of US non-financial firms. Financial amplification intensifies, because of stronger asset price reactions of highly...

Substantial progress has been made in recent years in integrating optimal portfolios into (open macro) general equilibrium models using standard local approximation (perturbation) methods. We compare these perturbation-based portfolio solution methods with a global portfolio solution method to...

TWe allow for heterogeneity in investors' ability to borrow from collateral in a Kiyotaki-Moore style macro model. We calibrate the model to match the quintiles of the distri- bution of leverage ratios of US non-financial firms. We show that financial amplification of the model with...

We compare the performance of the perturbation-based (local) portfolio solution method of Devereux and Sutherland (2010a, 2011) with a global solution method. We find that the local method performs very well when the model is designed to capture stylized macroeconomic facts and countries/agents...