This paper studies the ability of external imbalances to indicate subsequent exchange rate returns. We propose a simple twist of the Gourinchas and Rey (2007) approximation to the intertemporal budget constraint which is valid for countries that are net creditors (or net debtors) consistently...

This study analyzes the dynamics between real e ective exchange rates and current account patterns from a novel perspective. We start by dissecting long-run and time-varying short-run dynamics between both variables. Following this, we extend our framework by including interest rates into our...

In the recent global turmoil, even though some developing economies were severely affected, in general, developing countries survived the crisis with less damage than advanced countries. The majority of developing countries did not experience a financial system collapse. What are the main...

We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such...

We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such...

We examine the evolution of the Icelandic banking sector in its macroeconomic environment. The story culminates in the crisis of October 2008, when all three major banks in Iceland collapsed in three successive days. The country is still struggling to cope with the consequences. The paper...

We study how investor behaviour affects the transmission of ?financial crises. If investors exhibit decreasing relative risk aversion, then negative wealth shocks increase the risk premium required to hold risky assets. We integrate this into a second generation model of currency crises which...

Foreign portfolio flows constitute a key component of economic activity in small open economies such as Colombia. The dynamics of these flows are subject to the influence of both external (push) factors and domestic (pull) factors. Consequently, economic crises and episodes of financial distress...

Foreign portfolio flows constitute a key component of economic activity in small open economies such as Colombia. The dynamics of these flows are subject to the influence of both external (push) factors and domestic (pull) factors. Consequently, economic crises and episodes of financial distress...

This study analyzes the dynamics between real effective exchange rates and current account patterns from a novel perspective. We start by dissecting long-run and time-varying short-run dynamics between both variables. Following this, we extend our framework by including interest rates into our...