This paper develops a dynamic stochastic general equilibrium monetary portfolio choice model that accomplishes two objectives. First, it provides a theory of currency risk premia based on a weak and plausible form of fiscal non-neutrality. Domestic and foreign bonds become imperfect substitutes,...

This paper develops a dynamic stochastic general equilibrium monetary portfolio choice model that accomplishes two objectives. First, it provides a theory of currency risk premia based on a weak and plausible form of fiscal nonneutrality. Domestic and foreign bonds become imperfect substitutes,...

Foreign-currency exposures on an economy's external balance sheet may jeopardize financial stability when the exchange rate depreciates. In fact, theory suggests that in such an environment it may be optimal for monetary policy in a floating regime to reduce exchange rate variation in order to...