A Fiscal Theory of the Currency Risk Premium and of Sterilized Intervention
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Summary:
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.
Series:
Working Paper No. 2002/029
Subject:
Bonds Consumption Currencies Exchange rates Financial institutions Foreign exchange Monetary base Money National accounts
English
Publication Date:
February 1, 2002
ISBN/ISSN:
9781451844818/1018-5941
Stock No:
WPIEA0292002
Pages:
44
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