We propose a simple risk-adjusted linear approximation to solve a large class of dynamic models with time-varying and non-Gaussian risk. Our approach generalizes lognormal affine approximations commonly used in the macro-finance literature and can be seen as a first-order perturbation around the...

The marginal cost of aggregate fluctuations has a term structure that is a simple transformation of the term structures of equity and interest rates. I extract evidence from index option markets to infer a downward-sloping, volatile and procyclical term structure of welfare costs. On average,...

In RBC models, “disaster risk shocks” reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents' preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian...

This paper illustrates how a parsimonious macro-finance model can be exploited to investigate the frequency-domain properties of debt service implied by various financing strategies. This original approach is valuable to public debt managers seeking to assess the fiscal-hedging properties of the...

This paper studies the relationship between consumption and wealth based on the concept of cointegration. The analysis focuses on French data over the 1987 - 2006 period. This relationship is expressed in two ways: in terms of Marginal Propensity to Consume out of wealth (MPC) and in terms of...

This paper develops an arbitrage-free affine term structure model of potentially defaultable sovereign bonds to model a cross-section of eight euro area government bond yield curves since January 1999. The existence of a common monetary policy under European Monetary Union determines the short...

Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low...

We set up a model where asset price bubbles due to risk shifting can be moderated by capital requirements. However, imperfect information about the ratio of required capital, or, in the context of the sub-prime crisis, the extent of regulatory arbitrage, introduces uncertainty about the risk...

This paper analyses the role of credit rating agencies in sovereign debt crises. Using a panel of 53 emerging and developing countries with annual data going back to 1977, the paper shows that credit ratings are not very good predictors of debt distress events once tested against a simple...

This paper studies the social value of information about the future when agents are rationally inattentive. In a stylized OLG model of inflation the central bank (CB) can set money supply in response to the current price. The CB has perfect foresight about the future T shocks and releases this...