TY  - JOUR
AU  - Engel,Charles
TI  - On the Foreign-Exchange Risk Premium in Sticky-Price General Equilibrium Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7067
PY  - 1999
Y2  - April 1999
UR  - http://www.nber.org/papers/w7067
L1  - http://www.nber.org/papers/w7067.pdf
N1  - Author contact info:
Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706-1393
Tel: 608/262-3697
Fax: 608/262-2033
E-Mail: cengel@ssc.wisc.edu
AB  - This paper investigates the behavior of the foreign exchange risk premium in two recent two-country intertemporal-optimizing general equilibrium models with sticky nominal prices: Obstfeld-Rogoff (1998) and Devereux-Engel (1998). The foreign exchange risk premium in any general equilibrium model arises from the correlation of the exchange rate with consumption. In flexible price models, that requires correlation of monetary and output supply shocks. In sticky-price models, the correlation arises endogenously because monetary shocks cause output and consumption to change.  The size of the risk premium depends on how prices are set (in producers' currencies versus consumers' currencies), and on the form of the money demand function. In some cases, the risk premium generated by the model is quite large.
ER  -