Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanations of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk...

This paper analyses the impact of the shift away from a U.S. dollar focus of systemically important emerging market economies (EMEs) on configurations between the U.S. dollar, the euro and the yen. Given the difficulty that fixed or managed U.S. dollar exchange rate regimes remain pervasive and...

We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in...

The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to...

Financial markets have become increasingly global in recent decades, yet the pricing of internationally traded assets continues to depend strongly upon local risk factors, leading to several observations that are difficult to explain with standard frameworks. Equity returns depend upon both...

This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset...

This paper presents a sentiment-based explanation of the forward premium puzzle. Agents over- or underestimate the growth rate of the economy. All else equal, when perceived domestic growth is higher than perceived foreign growth, the domestic interest rate is higher than the foreign interest...

How are Asian financial markets interlinked and how are they linked to markets in developed countries? What is the main driver of fluctuations in Asian financial markets as well as real economic activities? In order to answer these questions, we estimate the spillover index proposed by Diebold...

The macroeconomic theories and models favoured by academics, as well as those used more commonly by policymakers, effectively rule out by assumption economic and financial crises of the sort we are living through. In particular, the longer run dangers posed by the rapid expansion of credit and...

The Japanese zero-interest rate period provides a "natural experiment" for investigating the effectiveness and transmission channels of sterilized intervention when traditional monetary policy options are constrained. This paper takes advantage of the fact that all interventions in the JPY/USD...