We introduce a portfolio friction in a two-country DSGE model where investors face a constant probability to make new portfolio decisions. The friction leads to a more gradual portfolio adjustment to shocks and a weaker portfolio response to changes in expected excess returns. We apply the model...

Recent research has shown that relaxing the assumptions of complete information and common knowledge in exchange rate models can shed light on a wide range of important exchange rate puzzles. In this chapter, we review a number of models we have developed in previous work that relax the strong...

Recent research has shown that relaxing the assumptions of complete informationand common knowledge in exchange rate models can shed light on a wide range ofimportant exchange rate puzzles. In this chapter, we review a number of models wehave developed in previous work that relax the strong...

The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. This result is behind the famous Meese-Rogoff puzzle. In this paper we evaluate whether parameter...

The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. This result is behind the famous Meese-Rogoff puzzle. In this paper we evaluate whether parameter...