It is frequently claimed that the expected yield on emerging market bonds commands a premium. Here we investigate the sources of this phenomenon. A stochastic general equilibrium model of a small open economy is analyzed numerically to derive conditions for interest rate premia. The novelty of...

Standard two-country macroeconomic models predict that high interest-rate currencies depreciate over time, as arbitrage eliminates profitable carry trade strategies. Empirical studies find that those currencies instead tend to appreciate - this is the "uncovered interest rate parity puzzle."...