High interest rate currencies tend to appreciate. This is the uncovered interest rate parity (UIP) puzzle. It is primarily a statement about short-term interest rates and how they are related to exchange rates. Short-term interest rates are strongly affected by monetary policy. The UIP puzzle, therefore, can be restated in terms of monetary policy. Do foreign and domestic monetary policies imply exchange rates that violate UIP? We represent monetary policy as foreign and domestic Taylor rules. Foreign and domestic pricing kernels determine the relationship between these Taylor rules and exchange rates. We examine different specifications for the Taylor rule and ask which can resolve the UIP puzzle. We find evidence in favor of a particular asymmetry. If the foreign Taylor rule responds to exchange rate variation but the domestic Taylor rule does not, the model performs better. A calibrated version of our model is consistent with many empirical observations on real and nominal exchange rates, including Fama's negative correlation between interest rate differentials and currency depreciation rates.

No abstract

Focusing on the 10 most traded currencies, we provide empirical evidence regarding a significant heterogeneous exposure to global growth news shocks. We incorporate this empirical fact in a frictionless risk‐sharing model with recursive preferences, multiple countries, and multiple consumption goods whose supply features both global and local short‐ and long‐run shocks. Since news shocks are priced, heterogeneous exposure to long‐lasting global growth shocks results in a relevant reallocation of international resources and currency adjustments. Our unified framework replicates the properties of the HML‐FX and HML‐NFA carry‐trade strategies studied by Lustig, Roussanov, and Verdelhan and Della Corte, Riddiough, and Sarno.

We study the international propagation of long-run risk in the context of a general equilibrium model with endogenous growth. Innovation and international diffusion of technologies are the channels at the core of our mechanism. A calibrated version of the model matches several asset pricing and macroeconomic quantity moments, alleviating some of the puzzles highlighted in the international macro-finance literature. Our model predicts that country-pairs that share more R&D have less volatile exchange rates and more correlated stock market returns. Using data from a sample of 19 developed countries, we provide suggestive empirical evidence in favor of our model's predictions.

Focusing on the ten most-traded currencies, we provide empirical evidence about a significant heterogenous exposure to global growth news shocks. We incorporate this empirical fact in a frictionless risk-sharing model with recursive preferences, multiple countries, and multiple consumption goods whose supply features both global and local short-and long-run shocks. Since news shocks are priced, heterogenous exposure to global long-lasting growth shocks results in a relevant reallocation of international resources and currency adjustments. Our unified framework replicates the properties of the HML-FX and HML-NFA carry trade strategies studied by Lustig et al. (2011) and Della Corte et al. (2013).