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A Fiscal Theory of the Currency Risk Premium and of Sterilized Intervention

Author

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  • Mr. Michael Kumhof
  • Stijn van Nieuwerburgh

Abstract

This paper develops a dynamic stochastic general equilibrium monetary portfolio choice model that accomplishes two objectives. First, it provides a theory of currency risk premia based on a weak and plausible form of fiscal nonneutrality. Domestic and foreign bonds become imperfect substitutes, the uncovered interest parity condition is replaced with a portfolio balance equation, and the central bank can separately choose the growth rate of its nominal anchor and the domestic bond interest rate. Second, it can turn be shown that, and how, sterilized intervention affects equilibrium allocations and prices.

Suggested Citation

  • Mr. Michael Kumhof & Stijn van Nieuwerburgh, 2002. "A Fiscal Theory of the Currency Risk Premium and of Sterilized Intervention," IMF Working Papers 2002/029, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/029
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=15614
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    Cited by:

    1. Dionísio Dias Carneiro & Thomas Yen Hon Wu, 2006. "Sovereign Risk and Out-of-Equilibrium Exchange Rate Dynamics," Textos para Discussão 10, Instituto de Estudos de Política Econômica.
    2. Shalva Mkhatrishvili & Giorgi Tsutskiridze & Lasha Arevadze, 2020. "Sterilized FX interventions may not be so sterilized," NBG Working Papers 02/2020, National Bank of Georgia.
    3. Xiaojing Song & Thu Phuong Truong & Mark Tippett & John van der Burg, 2022. "The quantity theory of stock prices," The European Journal of Finance, Taylor & Francis Journals, vol. 28(17), pages 1685-1707, November.
    4. Shalva Mkhatrishvili & Giorgi Tsutskiridze & Lasha Arevadze, 2020. "Sterilized FX interventions may not be so sterilized," NBG Working Papers 02/2020, National Bank of Georgia.

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