Using a stylized two-period model we compare portfolio solutions from two local solution approaches - the approach of Judd and Guu (2001) and the approach of Devereux and Sutherland (2010, 2011) - with the true nonlinear portfolio solution.

We introduce the tractable buffer stock savings setup of Carroll and Toche (2009 NBER Working Paper) into an otherwise conventional New-Keynesian dynamic stochastic general equilibrium model with financial frictions. The introduction of a precautionary saving motive arising from an uninsurable...

We propose a model of a risky mortgage-lending market in which we take explicit account of heterogeneity in household borrowing conditions, by introducing two borrower types: one with a low loan-to-value (LTV) ratio, one with a high LTV ratio, calibrated to U.S. data. We use such framework to...

A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a timevarying risk premium. This paper presents a mechanism in a simple two-country two-good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a...

TWe allow for heterogeneity in investors' ability to borrow from collateral in a Kiyotaki-Moore style macro model. We calibrate the model to match the quintiles of the distri- bution of leverage ratios of US non-financial firms. We show that financial amplification of the model with...