Expansionary fiscal policies have increased significantly following the subprime crisis in 2007 and the COVID-19 crisis, leading to fiscal dominance concerns, where a growing share of monetary authorities may be forced to deviate from policy targets to accommodate fiscal policies. Meanwhile,...

We show analytically that in a rational expectations present value model, an asset price manifests near random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the well known puzzle that fundamental...

The traditional case for flexibility in nominal exchange rates assumes that there is nominal price stickiness that prevents relative prices from adjusting in response to real shocks. When prices are sticky in producers' currencies, nominal exchange rate changes can achieve the relative price...

Exchange-rate models fit very well for the U.S. dollar in the 21st century. A "standard" model that includes real interest rates and a measure of expected inflation for the U.S. and the foreign country, the U.S. comprehensive trade balance, and measures of global risk and liquidity demand is...

Countries have increased significantly their public-sector borrowing since the Global Financial Crisis. In this context, we document several potential fiscal dominance effects during 2000-2017 under Inflation Targeting (IT), and non-IT regimes. Higher ratios of public debt-to-GDP are associated...

We outline two divergent exit strategies of the U.S. from the post COVID-19 debt-overhang, and analyze their implications on Emerging Markets and global stability. The first strategy is the U.S. aiming at returning to the 2019, pre-COVID mode of loose fiscal policy and accommodating monetary...

This paper investigates the factors explaining exchange market pressures (EMP) and the hoarding and use of international reserves (IR) by emerging markets during the 2000s, as the Great Moderation turned to the 2008-9 global crisis and great recession. According to our results, both financial...

Using the "trilemma indexes" developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma--monetary independence, exchange rate stability, and financial openness--we examine how policy configurations affect macroeconomic...

This study quantitatively investigates the currency composition of sovereign debt in the presence of two types of limited enforcement frictions arising from a government's monetary and debt policy: strategic currency debasement and default on sovereign debt. Local currency debt obligations are...

We investigate why and how the financial conditions of developing and emerging market countries (peripheral countries) can be affected by the movements in the center economies - the U.S., Japan, the Eurozone, and China. We apply a two-step approach. First, we estimate the sensitivity of...