Empirical research on the permanent income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income. This finding is interpreted as strong evidence against the PIH. We propose an explanation for apparent excess sensitivity that is based on a...

This paper studies firms' usage of interest rate swaps to manage risk in a model economy driven by aggregate productivity shocks, inflation shocks, and counter-cyclical idiosyncratic productivity risk. Consistent with empirical evidence, firms in the model are fixed-rate payers, and swap...

Exchange rates and option prices incorporate market participants' views about the credibility and the effects of exchange rate targets. This paper presents a tractable exchange rate model for the Euro-Swiss franc floor that can be used to price options. The model is estimated with exchange rate...