Por Kimberly A. Berg (Miami University, Ohio) y Nelson C. Mark (University of Notre Dame)
Working paper May 2017
This paper builds a two-country dynamic stochastic general equilibrium macro model to understand three empirical facts about international currency returns. They are the downward forward premium bias, the carry trade return, and the long-run risk reversal. A model with incomplete markets, country heterogeneity in productivity, and country heterogeneity in monetary policies is qualitatively consistent with these facts.