We propose a new model of exchange rates, which yields a theory of the forward premium puzzle. Our explanation combines … occur and affect each country's productivity. Each country's exposure to disaster risk varies over time according to a mean …-reverting process. Risky countries command high risk premia: they feature a depreciated exchange rate and a high interest rate. As their …

particularly effective to address risk-premium shocks that affect the interest rate differential foreign investors require in a …. We show that capital controls may be optimal even if the exchange rate is not fixed in response to risk premium shocks or …