We describe a novel currency investment strategy, the 'dollar carry trade,' which delivers large excess returns, uncorrelated with the returns on well-known carry trade strategies. Using a no-arbitrage model of exchange rates we show that these excess returns compensate U.S. investors for taking...

Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate di®erential and why high interest rate currencies do not depreciate as much as the interest rate di®erential. We sort foreign currency returns into portfolios based on...

Investors earn positive excess returns on high interest rate foreign discount bonds, because these currencies appreciate on average. Lustig and Verdelhan (2005) show that investing in high interest rate foreign discount bonds exposes them to more aggregate consumption risk, while low interest...

We derive new estimates of total wealth, the returns on total wealth, and the wealth effect on consumption. We estimate the prices of aggregate risk from bond yields and stock returns using a no-arbitrage model. Using these risk prices, we compute total wealth as the price of a claim to...

This paper presents a fully rational general equilibrium model that produces a time-varying exchange rate risk premium and solves the uncovered interest rate parity (U.I.P) puzzle. In this two-country model, agents are characterized by slow-moving external habit preferences similar to Campbell &...

Changes in exchange rates are not random. Two economically motivated factors account for 20% to 90% of the daily, monthly, quarterly, and annual exchange rate movements in developed countries and in emerging and developing countries with floating exchange rates. The different shares of...

What accounts for the unprecedented decline in world trade during the crisis? What have been the consequences of shifting risk appetites for international capital flows? How have they differed across developed and developing economies? We answer these questions in an international real business...

Emerging countries tend to default when their economic conditions worsen. If bad times in an emerging country correspond to bad times for the US investor, then these foreign sovereign bonds are particularly risky and should offer high returns. We explore how this mechanism plays out in the data...

We explore the implications of recursive utility for the conduct of fiscal policy.