A Fiscal Theory of the Currency Risk Premium and of Sterilized Intervention

Michael Kumhof and Stijn Van Nieuwerburgh

No 2002/029, IMF Working Papers from International Monetary Fund

Abstract: This paper develops a dynamic stochastic general equilibrium monetary portfolio choice model that accomplishes two objectives. First, it provides a theory of currency risk premia based on a weak and plausible form of fiscal nonneutrality. Domestic and foreign bonds become imperfect substitutes, the uncovered interest parity condition is replaced with a portfolio balance equation, and the central bank can separately choose the growth rate of its nominal anchor and the domestic bond interest rate. Second, it can turn be shown that, and how, sterilized intervention affects equilibrium allocations and prices.

Keywords: WP; exchange rate; Sterilized intervention; fiscal non-neutrality; currency risk premium; portfolio balance theory; portfolio share; rate of exchange rate depreciation; exchange rate volatility; money stock; currency risk; b. money growth rate; monetary policy; growth rule; risk premia; Exchange rates; Currencies; Consumption; Bonds; Monetary base (search for similar items in EconPapers)
Pages: 44
Date: 2002-02-01
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=15614 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2002/029

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().