Citation:
Obstfeld, Maurice, Kenneth Rogoff, Elhanan Helpman, and Effraim Sadka. 2002. “Risk and Exchange Rates.” Contemporary Economic Policy: Essays in Honor of Assaf Razin. Cambridge: Cambridge University Press.
Paper | 1020 KB |
Abstract:
This paper develops an explicitly stochastic new open economy macroeconomics' model, which can potentially be used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes. A crucial feature is that we do not simplify by assuming certainty equivalence for producer price setting behavior. Our framework also provides a sticky-price alternative to Lucas's (1982) exchange rate risk premium model. We show that the level risk premium' in the exchage rate is potentially quite large and may be an important missing fundamental in empirical exchange rate equations. As a byproduct analysis also suggests an intriguing possible explanation of the forward premium puzzle.
See also: New Open Economy Macroeconomics