Since 2008, the central banks of advanced countries have borrowed trillions of dollars from their commercial banks in the form of interest-paying reserves and invested the proceeds in portfolios of risky assets. We investigate how this new style of central banking affects central banks'...

Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases. The local currency term premia, which increase with the maturity, offset the currency risk premia. The time-series predictability of foreign bond returns in dollars...

A framework is developed for macroeconomic policy analysis in four countries of Central Europe (CE) in transition to EU membership (Czech Republic, Hungary, Poland, and Slovakia). A Multi-Annual Fiscal Adjustment Strategy (MAFAS) and a Pre-Pegging Exchange Rate Regime (PPERR) appropriate for...

While economic theory highlights the usefulness of flexible exchange rates in promoting adjustment in international relative prices, flexible exchange rates also can be a source of destabilizing shocks. We find that when countries joining the euro currency union abandoned their national exchange...

Firms in emerging markets are exposed to severe financial frictions and credit constraints, that are exacerbated by the sudden stop of capital inflows. Can monetary policy offset this external credit squeeze? We show that although this may be the case during moderate contractions (or in partial...

This paper examines the inflation targeting experience in three transition countries: the Czech Republic, Poland and Hungary. While the examined countries have missed inflation targets often by a large margin, they nevertheless progressed well with disinflation. A key lesson from the experience...

We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap...

We study a novel policy tool—interest rate uncertainty—that can be used to discourage inefficient capital inflows and to adjust the composition of external accounts between short-term securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between...

Using a model with upfront sunk costs, heterogeneous firms, and endogenous exchange rates, this paper demonstrates theoretically that volatility in fundamental variables such as the nominal interest rate that drive exchange rate volatility can simultaneously impact the entry behavior of...

Compared to the predictions of complete market models, actual exchange rates are puzzlingly smooth and only weakly correlated with macro-economic fundamentals, suggesting that market incompleteness plays a key role in exchange rate dynamics. Incompleteness in international financial markets...