A vector autoregression is used to elicit the empirical facts co ncerning exchange rate movements. The author finds (1) the exchange rate, relati ve price levels, and trade balances are closely related;(2) most other lagged v ariables have no perceptible influence in theexchange rate equation; (3) exchan ge rate innovations are negativelycorrelated with innovations in output and pri ces, positively with innovations in the balance of trade, and almost not at all with innovations in money; and (4) impulses in money, trade balances, and govern ment spending are followed by opposing future movements in theexchange rate and the price level. Taken as a whole, the evidence suggests that exchange rate cha nges may be associated with real, rather than monetary, shocks. Copyright 1986 by MIT Press.

We introduce borrowing constraints into the life-cycle theory of labor supply and show that they account for observed profiles in consumption, earnings, and hours worked. They can also account for differences in occupational choice across individuals who differ in initial wealth, marital status, or ability. This formalizes several aspects of observed differences in the labor-force behavior of men and women.

We examine the dynamic path of an economy after a change in regime, when neither the policy to be followed nor the reactions of the public are known. The model is an application of Kreps and Wilson's reputation model to Barro and Gordon's macroeconomic policy game. Equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector. It involves mixed strategies and Bayesian learning by both sides until the uncertainty about government and public behaviour is resolved. The absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation. The analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics.

We contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century. Although the magnitude of output fluctuations has varied across countries and periods, relations among real quantities have been remarkably uniform. Properties of price levels, however, exhibit striking differences between periods. Inflation rates are more persistent after World War II than before, and price-level fluctuations are typically procyclical before World War II and countercyclical afterward. Fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods.

We provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in the terms of trade, but positively correlated with past movements. We document the same properties in a two-country stochastic growth model in which trade fluctuations reflect, in large part, the dynamics of capital formation. We find that our general-equilibrium perspective is essential: the relation between the trade balance and the terms of trade depends critically on the source of fluctuations.

Forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure (the intertemporal marginal rate of substitution). Representative agent theory with time-additive preferences cannot account for either of these properties. The authors show that the theory does considerably better along these dimensions when the representative agent's preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data–in particular, the strong autocorrelation of forward premiums.

ABSTRACT We propose two data‐based performance measures for asset pricing models and apply them to models with recursive utility and habits. Excess returns on risky securities are reflected in the pricing kernel's dispersion and riskless bond yields are reflected in its dynamics. We measure dispersion with entropy and dynamics with horizon dependence, the difference between entropy over several periods and one. We compare their magnitudes to estimates derived from asset returns. This exercise reveals tension between a model's ability to generate one‐period entropy, which should be large, and horizon dependence, which should be small.

We explore the term structures of claims to a variety of cash flows, namely, US government bonds (claims to dollars), foreign government bonds (claims to foreign currency), inflation-adjusted bonds (claims to the price index), and equity (claims to future equity indexes or dividends). The average term structures reflect the dynamics of the dollar pricing kernel, cash flow growth, and the interaction between the two. We use an affine model to illustrate how these two components can deliver term structures with a wide range of levels and shapes. Finally, we calibrate a representative agent economy to show that the evidence is consistent with the equilibrium models.

Long-run asset pricing restrictions in a macro term structure model identify discretionary monetary policy separately from a policy rule. We find that policy discretion is an important contributor to aggregate risk. In addition, discretionary easing coincides with good news about the macroeconomy in the form of lower inflation, higher output growth, and lower risk premiums on short-term nominal bonds. However, it also coincides with bad news about long-term financial conditions in the form of higher risk premiums on long-term nominal bonds. Shocks to the rule correlate with changes in the yield curve’s level. Shocks to discretion correlate with changes in its slope.