Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium

General equilibrium real and nominal interest rates

We derive the general equilibrium short-term real and nominal interest rates in a monetary economy affected by technological and monetary shocks and where the price level dynamics is endogenous. Assuming fairly general processes for technology and money supply, we show that an inherent feature of our equilibrium is that any real variable dynamics, in particular that of the short-term real inter...

Time-Varying Lower Bound of Interest Rates in Europe∗

We study the effectiveness of the ECB’s negative interest rate policy on the yield curve with a new shadow-rate term structure model. Our model captures the discrete nature of the policy rate and a non-constant spread between it and the short end of the government bond yield curve. We price bonds with forward-looking agents, and find all modeling components are crucial to match the yield data a...

Nonlinearity In Exchange Rates and Forecasting

Equilibrium models of exchange rates

Most of the large industrialized countries floated their exchange rates in early 1973, after the demise of the post-war Bretton Woods system of fixed exchange rates. While there have been extensive academic disputes over the relative merits of fixed and floating exchange rates, most discussions have been carried out on a largely hypothetical basis. The move to a generalized floating regime prov...

Real Exchange Rates and Time-Varying Trade Costs

In a recent paper Jacks et al. (2008) advocate a micro-founded measure for bilateral trade costs. We employ this measure and extend two nonlinear models for the real exchange rate so as to re-examine the Purchasing Power Parity hypothesis in the presence of time-varying trade costs. Using data for the dollar-sterling real exchange rate from 1830 to 2005, we provide significant evidence in favor...