Despite the growing integration of international financial markets, investors do not diversify internationally to any significant extent. We show that this "international diversification puzzle" is deepened once we consider the implications of nontraded human capital for portfolio composition. While growth rates of labor and capital income are not highly correlated within countries, we find that the returns to human capital and physical capital are very highly correlated within four OECD countries. Hedging human capital risk therefore involves a substantial short position in domestic marketable assets. A diversified world portfolio will involve a negative position in domestic marketable assets.

We measure the cost of consumption fluctuations using an approach that does not require the specification of preferences and instead uses asset prices. We measure the marginal cost of consumption fluctuations, the per unit benefit of a marginal reduction in consumption fluctuations expressed as a percentage of lifetime consumption. We find that the gains from eliminating all consumption uncertainty are very large. However, for consumption fluctuations corresponding to business cycle frequencies, we estimate the marginal cost to be between 0.08 percent and 0.49 percent of lifetime consumption.

We study capital regulation in a dynamic model for bank deposits. Capital regulation addresses banks’ incentive for excessive leverage that dilutes depositors, but preserves some dilution to reduce bank defaults. We show theoretically that capital regulation is subject to a time inconsistency problem. In a model with non-maturing deposits where optimal withdrawals make deposits endogenously long-term, we find commitment to have important effects on the optimal level and cyclicality of capital adequacy. Our results call for a systematic framework that limits capital regulators’ discretion.

Since January 2014, the U.S. Treasury has been issuing floating rate notes (FRNs). These notes pay quarterly interest based on an average of the constant maturity rates of newly issued three-month T-bills during the quarter. We show how to price such FRNs. We estimate that they have been paying excess interest between 3 and 42 basis points above the implied interest of other Treasury securities. We interpret this fact through the lens of a model where money-like assets differ in their degrees of moneyness. Additional empirical evidence supports this interpretation.

This paper studies China's recent exchange rate policy for the renminbi (RMB). We demonstrate empirically that a two‐pillar policy is in place, aiming to balance exchange rate flexibility and RMB index stability via market and basket pillars. We further extend and validate the formulation that incorporates the so‐called countercyclical factor. Theoretically, we develop a flexible‐price monetary model for the RMB in which the two‐pillar policy arises endogenously as an optimal response of the government. We estimate the model by generalized method of moments and quantitatively assess various policy trade‐offs.

We develop a tractable general equilibrium model that captures the interplay between nominal long-term corporate debt, inflation, and real aggregates. We show that unanticipated inflation changes the real burden of debt and, more significantly, leads to a debt overhang that distorts future investment and production decisions. For these effects to be both large and very persistent, it is essential that debt maturity exceeds one period. We also show that interest rate rules can help stabilize our economy.