A Fiscal Theory of the Currency Risk Premium and of Sterilized Intervention
February 1, 2002
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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.
Subject: Bonds, Consumption, Currencies, Exchange rates, Financial institutions, Foreign exchange, Monetary base, Money, National accounts
Keywords: b. money growth rate, Bonds, Consumption, Currencies, currency risk, currency risk premium, exchange rate, exchange rate volatility, Exchange rates, fiscal non-neutrality, growth rule, Monetary base, monetary policy, money stock, portfolio balance theory, portfolio share, rate of exchange rate depreciation, risk premia, Sterilized intervention, WP
Pages:
44
Volume:
2002
DOI:
Issue:
029
Series:
Working Paper No. 2002/029
Stock No:
WPIEA0292002
ISBN:
9781451844818
ISSN:
1018-5941
