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Keywords:Real exchange rate 

Working Paper
International Asset Markets and Real Exchange Rate Volatility

The real exchange rate is very volatile relative to major macroeconomic aggregates and its correlation with the ratio of domestic over foreign consumption is negative (Backus-Smith puzzle). These two observations constitute a puzzle to standard international macroeconomic theory. This paper develops a two country model with complete asset markets and limited enforcement for international financial contracts that provides a possible explanation of these two puzzles. The model performs better than a standard incomplete markets model with a single non-contingent bond unless very tight borrowing ...
International Finance Discussion Papers , Paper 884

Report
Default Risk, Sectoral Reallocation and Persistent Recessions

Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for nontradable sectors. This paper documents this pattern using Spanish data and builds a two-sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock increases the likelihood of default, limits capital in?ows, and thus restricts the ability of the economy to exploit investment opportunities. The economy responds by ...
Staff Report , Paper 555

Report
Equilibrium Price Dispersion and the Border Effect

We develop a model of equilibrium price dispersion via retailer search and show that the degree of market segmentation within and across countries cannot be separately identified by good-level price data alone. We augment a set of well-known empirical facts about the failure of the law of one price with data on aggregate intranational and international trade quantities, and calibrate the model to match price and quantity facts simultaneously. The calibrated model matches the data very well and implies that within-country markets are strongly segmented, while international borders contribute ...
Staff Report , Paper 522

Working Paper
Exchange Rates and Endogenous Productivity

Real exchange rates (RERs) display sizable uctuations not only over the business cycle, but also at lower frequencies, resulting in large and persistent swings over decades|facts that many business cycle models struggle to match. We propose an international macroeconomics model with endogenous productivity to rationalize these facts. In the model, endogenous growth amplifies stationary uctuations generating persistent productivity differences between countries that trigger low-frequency cycles in the RER. The estimated model effortlessly replicates the empirical spectrum, autocorrelation, and ...
International Finance Discussion Papers , Paper 1301

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