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Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium

  • Fernando Alvarez
  • Andrew Atkeson
  • Patrick J. Kehoe

Under mild assumptions, the data indicate that fluctuations in nominal interest rate differentials across currencies are primarily fluctuations in time-varying risk. This finding is an immediate implication of the fact that exchange rates are roughly random walks. If most fluctuations in interest differentials are thought to be driven by monetary policy, then the data call for a theory which explains how changes in monetary policy change risk. Here, we propose such a theory based on a general equilibrium monetary model with an endogenous source of risk variation—a variable degree of asset market segmentation. Copyright , Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2009.00537.x
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 76 (2009)
Issue (Month): 3 ()
Pages: 851-878

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Handle: RePEc:oup:restud:v:76:y:2009:i:3:p:851-878
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