We examine the expected survival time of a unilateral exchange rate target zone, when constraints on monetary policy prevent the central bank from exclusively focusing on defending the target zone. Generally, the width of the target zone has a negligible effect on the expected survival time, and...

This paper extends the Krugman target zone model by including a realignment mechanism. Various properties of that realignment mechanism are discussed. The movement of the exchange rate is governed both by a Wiener process on fundamental and by a Poisson jump process with endogenous realignment...

In this essay, I discuss and compare two ways of modeling international capital market equilibrium: the orthodox, general-equilibrium approach and the heterodox, partial-equilibrium CAPM (Capital Asset Pricing Model) approach. The benchmark for this comparison is the model's ability to provide...

We incorporate trading fees in a long-horizon dynamic general-equilibrium model in which traders optimally and endogenously decide when and how much to trade. A full characterization of equilibrium is provided, which allows us to study the dynamics of equilibrium trades, equilibrium asset prices...

Firms differ in the extent to which they 'pass through' changes in exchange rates into foreign currency prices and in their 'exposure' to exchange rates - the responsiveness of their profits to changes in exchange rates. Because pricing affects profitability, a firm's pass-through and exposure...

Black and Scholes (1973) implied volatilities tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black-Scholes constant volatility assumption is...

Implied volatility quot;smilesquot; have been documented in a number of option markets worldwide. The volatilities implied by the Black-Scholes (1973) model tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and...

We show that a central planner with two selves, or two quot;pseudo welfare functionsquot;, are sufficient to deliver a market equilibrium that prevails among any (finite) number of heterogeneous individual agents acting competitively in an incomplete financial market. Furthermore, we are able to...

In the presence of transactions costs, no matter how small, arbitrage activity does not necessarily render equal all riskless rates of return. When two such rates follow stochastic processes, it is not optimal immediately to arbitrage out any discrepancy that arises between them. The reason is...