We present a theory in which the key driver of short-term debt issued by the financial sector is the portfoliodemandforsafeandliquidassetsbythenon-financial sector. Households ’ demand for safe andliquidassetsdrivesapremiumonsuchassetsthatthefinancial sector exploits by owning risky and...

We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such...

This paper proposes a way to model boundedly rational dynamic programming in a parsimonious and tractable way. It first illustrates the approach via a boundedly rational version of the consumption-saving life cycle problem. The consumer can pay attention to the variables such as the interest...