Time-varying risk, interest rates, and exchange rates in general equilibrium

Fernando Alvarez, Andrew Atkeson, Patrick J. Kehoe

Research output: Contribution to journalArticle

51 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)851-878
Number of pages28
JournalReview of Economic Studies
Volume76
Issue number3
DOIs
StatePublished - Jun 25 2009

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Interest rates
Exchange rates
Fluctuations
General equilibrium
Time-varying risk
Monetary policy
Nominal interest rate
Policy change
Market segmentation
Random walk
Currency
Asset markets
Interest rate differentials

Cite this

Time-varying risk, interest rates, and exchange rates in general equilibrium. / Alvarez, Fernando; Atkeson, Andrew; Kehoe, Patrick J.

In: Review of Economic Studies, Vol. 76, No. 3, 25.06.2009, p. 851-878.

Research output: Contribution to journalArticle

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