Current account crises in emerging markets are characterized by large increases in interest rates, big drops in output, and large real currency depreciations. Current models of crisis with financial frictions do not generate very large movements in these variables. Recent work has shown that the...

This paper presents a fully rational general equilibrium model that produces a time-varying exchange rate risk premium and solves the uncovered interest rate parity (U.I.P) puzzle. In this two-country model, agents are characterized by slow-moving external habit preferences similar to Campbell &...

The inability of a wide array of dynamic stochastic general equilibrium (DSGE) models to generate fluctuations that resemble actual business cycles has lead to the use of habit formation in consumption. For example, habit formation has been shown to help explain the negative response of labour...

In this paper we model the contribution of monetary growth shocks to aggregate fluctuations. Our innovation is to combine persistent money growth shocks with taxes on nominal capital gains in a model in which the central bank operates policy using an interest rate rule. All three features are...

A number of recent papers have concluded that stochastic volatility plays a prominent role in describing the business cycle, particularly for the characterization of monetary policy. The impact of including stochastic volatility in DSGE models remains, however, unexplored. This paper therefore...

If strong and persistent misalignments of the exchange rate are caused by non-fundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then central bank intervention may act as a coordinating signal, encouraging stabilizing...

We examine out of sample predictive power of real time monetary models with nonlinear adjustment in forecast errors for the Pound Sterling/US Dollar exchange rates. Real time revisions of U.K. and U.S. monetary aggregates and output are significant. By studying recursive out of sample forecast...