This paper documents two facts about countries with floating exchange rates where monetary policy controls inflation using a short-term interest rate. First, the current real exchange rate predicts future changes in the nominal exchange rate at horizons greater than two years both in sample and...

This paper argues that a principal cause of the 1997 Asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems. The expectation that these future deficits would be at least partially financed by seigniorage revenues or an...

We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The...

Recent empirical work suggests that small price changes are relatively common. This evidence has been used to criticize classic menu-cost models. In this paper, we use scanner data from a national supermarket chain and micro data from the Consumer Price Index to reassess the importance of small...

We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The...

Standard representative-agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset-pricing puzzles, arises because these models load all uncertainty onto...

We argue that the government spending multiplier can be very large when the nominal interest rate is constant. We focus on a natural case in which the interest rate is constant, which is when the zero lower bound on nominal interest rates binds. For the economies that we consider it is optimal...

We argue that the government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds. The larger is the fraction of government spending that occurs while the nominal interest rate is zero, the larger is the value of the multiplier. After...

We study the properties of the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. This strategy generates payoffs which are on average large and uncorrelated with traditional risk factors. We investigate...

This paper uses the Flow of Funds accounts to assess the impact of a monetary policy shock on the borrowing and lending activities of different sectors of the economy. Our measures of contractionary monetary policy shocks have the following properties: (i) they are associated with a fall in...