TY  - JOUR
AU  - Gourio,François
AU  - Siemer,Michael
AU  - Verdelhan,Adrien
TI  - International Risk Cycles
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17277
PY  - 2011
Y2  - August 2011
UR  - http://www.nber.org/papers/w17277
L1  - http://www.nber.org/papers/w17277.pdf
N1  - Author contact info:
Francois Gourio
Department of Economics
Boston University
270 Bay State Road
Boston, MA 02215
Tel: 617/353-4534
Fax: 617/353-4449
E-Mail: fgourio@bu.edu

Michael Siemer
Department of Economics
Boston University
270 Bay State Road
Boston, MA 02215
E-Mail: msiemer@bu.edu

Adrien Verdelhan
MIT Sloan School of Management
100 Main Street, E62-621
Cambridge, MA 02142
Tel: 617/253-5123
E-Mail: adrienv@mit.edu
AB  - Recent work in international finance suggests that the forward premium puzzle can be accounted for if (1) aggregate uncertainty is time-varying, and (2) countries have heterogeneous exposures to a world aggregate shock. We embed these features in a standard two-country real business cycle framework, and calibrate the model to match the differences between low and high interest rates countries. Unlike traditional real business cycle models, our model generates volatile exchange rates, a large currency forward premium, "excess comovement'' of asset prices relative to quantities, and an imperfect correlation between relative consumption growth and exchange rates. Our model implies, however, that high interest rate countries have smoother quantities, equity returns and interest rates than low interest rate countries, contrary to the data.
ER  -