I develop a two-country New Keynesian model with capital accumulation and incomplete international asset markets that provides novel insights on the effect that imperfect international risk-sharing has on international business cycles and RER dynamics. I find that business cycles appear similar...

This paper re-assesses the problem of general equilibrium models in matching the behaviour of real exchange rate. We do so by developing a two country general equilibrium model with non-traded goods, home bias, incomplete markets and partial degrees of pass through as well as nominal rigidities...

This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply side shocks. In the...

I build a symmetric two-country model that incorporates nominal rigidities, local-currency pricing and monopolistic competition distorting the goods markets. The model is similar to the framework developed in Martínez-García and Søndergaard (2008a, 2008b), but it also introduces frictions in...

Fama's (1984) volatility relations show that the risk premium in foreign exchange markets is more volatile than, and is negatively correlated with the expected rate of depreciation. This paper studies these relations from the perspective of goods markets frictions. Using a sticky-price general...

This technical note is developed as a mathematical companion to the paper ‘The Real Exchange Rate in Sticky Price Models: Does Investment Matter?' (GMPI working paper no.17). It contains three basic calculations. First, we derive the equilibrium conditions of the model. Second, we compute the...

In this paper, I consider modeling the effects of the macroeconomic determinants on the nominal exchange rate to be channeled through the transition probabilities in a Markovian process. The model posits that the deviation of the exchange rate from its fundamental value alters the market's...

This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the...

During the last two decades, the degree of openness of national financial systems has increased substantially. At the same time, asymmetries in information and other financial market frictions have remain prevalent. We study both empirically and theoretically the implications of the opening up...

Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been...