Journal Article

Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium

Fernando Alvarez, Andrew Atkeson and Patrick J. Kehoe

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 76, issue 3, pages 851-878
Published in print July 2009 | ISSN: 0034-6527
Published online July 2009 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00537.x
Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium

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  • International Finance
  • Monetary Policy, Central Banking, and the Supply of Money and Credit
  • Money and Interest Rates

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Under mild assumptions, the data indicate that fluctuations in nominal interest rate differentials across currencies are primarily fluctuations in time-varying risk. This finding is an immediate implication of the fact that exchange rates are roughly random walks. If most fluctuations in interest differentials are thought to be driven by monetary policy, then the data call for a theory which explains how changes in monetary policy change risk. Here, we propose such a theory based on a general equilibrium monetary model with an endogenous source of risk variation—a variable degree of asset market segmentation.

Keywords: E43; E52; F31

Journal Article.  13108 words.  Illustrated.

Subjects: International Finance ; Monetary Policy, Central Banking, and the Supply of Money and Credit ; Money and Interest Rates

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