This paper develops a model of central-bank intervention based upon a policy characteristic of foreign-exchange interventions by the United States, Germany, and Japan in the late 1980's and evaluates it empirically. Central bankers intervene with greater intensity as rates deviate from target levels, but they also try to stabilize rates around current levels. The model is estimated using exchange rates and data based upon observed central-bank interventions. Interestingly, the estimates of the model are consistent with the predictions of the theoretical model for both the deutsche-mark/dollar rate and, less strongly, for the yen/dollar rate.

Recent evidence concerning dollar forecasts during the early 1980s have led to assertions that the market was irrational. This paper investigates an alternative interpretation. Following the tightening of the U.S. money market, agents did not immediately believe that the change would persist, but instead learned the shift rationally. Empirical simulations indicate that the model appears consistent with about half of the dollar's under prediction implied by the forward market during the period.

Recent research in international business cycles finds that international consumption comovements do not match the risk-sharing predictions of standard complete markets models. In this paper, I ask whether two different types of explanations can help explain this result: (1) nonseparabilities between tradables and nontradable leisure or goods and (2) the effects of capital market restrictions on consumption risk sharing. I find that risk sharing cannot be resolved by either explanation alone. However, when I allow for both nonseparabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries.

Recent empirical studies of the risk premium across foreign exchange and other asset markets, such as equity and longer term bonds, have found conflicting evidence about the latent variable model restrictions of the consumption-based intertemporal capital asset pricing model. While studies using data for holding periods of one month or less generally reject the model, evidence using three-month holding periods indicates that the model cannot be rejected when including the returns on long relative to short deposit rates. This paper investigates the sources of differences in results using returns on foreign exchange and Eurocurrency deposits at three different maturities.

Investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest, a phenomenon called “equity home bias.” In the absence of this bias, investors would optimally diversify domestic output risk using foreign equities. Therefore, consumption growth rates would tend to co-move across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates, a phenomenon I call “consumption home bias.” In this paper, I discuss these two biases and their potential relationship as suggested by the literature.

[Foreign exchange returns exhibit behavior difficult to reconcile with standard theoretical models. This article asks whether the recent findings of long swings in exchange rates between appreciating and depreciating periods affect estimates of the foreign exchange risk premium. We demonstrate how the "peso problem" introduced by expected shifts in exchange rate regimes can affect inferences about the risk premium in at least two ways: (1) it can make the foreign exchange risk premium appear to contain a permanent disturbance when it does not; and (2) it can induce bias in the foreign exchange return regressions such as in Fama (1984).]

Recent research in international business cycles finds that international consumption comovements do not match the risk-sharing predictions of standard complete markets models. In this paper, I ask whether two different types of explanations can help explain this result: (1) nonseparabilities between tradables and nontradable leisure or goods and (2) the effects of capital market restrictions on consumption risk sharing. I find that risk sharing cannot be resolved by either explanation alone. However, when I allow for both nonseparabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries.

Recent empirical studies suggest that nominal interest rates and expected inflation do not move together one-for-one in the long run, a finding at odds with many theoretical models. This article shows that these results can be deceptive when the process followed by inflation shifts infrequently. The authors characterize the shifts in inflation by a Markov switching model. Based upon this model's forecasts, they reexamine the long-run relationship between nominal interest rates and inflation. Interestingly, the authors are unable to reject the hypothesis that, in the long run, nominal interest rates reflect expected inflation one-for-one.

ABSTRACT Recent empirical studies of the risk premium across foreign exchange and other asset markets such as equity and longer term bonds have found conflicting evidence about the latent variable model restrictions of the consumption‐based intertemporal capital asset pricing model. While studies using data for holding periods of one month or less generally reject the model, evidence using three‐month holding periods indicates that the model cannot be rejected when including the returns on long relative to short deposit rates. This paper investigates the sources of differences in results using returns on foreign exchange and Eurocurrency deposits at three different maturities.