International Risk Cycles / François Gourio, Michael Siemer, Adrien Verdelhan.

Format:

Book

Author/Creator:

Gourio, François.

Contributor:

National Bureau of Economic Research.

Siemer, Michael.

Verdelhan, Adrien.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17277.

NBER working paper series no. w17277

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

Recent work in international finance suggests that the forward premium puzzle can be accounted for if (1) aggregate uncertainty is time-varying, and (2) countries have heterogeneous exposures to a world aggregate shock. We embed these features in a standard two-country real business cycle framework, and calibrate the model to match the differences between low and high interest rates countries. Unlike traditional real business cycle models, our model generates volatile exchange rates, a large currency forward premium, "excess comovement'' of asset prices relative to quantities, and an imperfect correlation between relative consumption growth and exchange rates. Our model implies, however, that high interest rate countries have smoother quantities, equity returns and interest rates than low interest rate countries, contrary to the data.

Notes:

Print version record

August 2011.