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.

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.

ABSTRACT One of the most puzzling features of currency prices is the forward premium anomaly : the tendency for high interest rate currencies to appreciate. We characterize the anomaly in the context of affine models of the term structure of interest rates. In affine models, the anomaly requires either that state variables have asymmetric effects on state prices in different currencies or that nominal interest rates take on negative values with positive probability. We find the quantitative properties of either alternative to have important shortcomings.

The authors ask whether a two-country business cycle model can account simultaneously for domestic and international aspects of business cycles. With this question in mind, the authors document a number of discrepancies between theory and data. The most striking discrepancy concerns the correlations of consumption and output across countries. In this data, outputs are generally more highly correlated across countries than consumptions. In the model they see the opposite. Copyright 1992 by University of Chicago Press.

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. We 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 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. We 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.