Reverse Engineering the Yield Curve

Prices of riskfree bonds in any arbitrage-free environment are governed by a pricing kernel: given a kernel, we can compute prices of bonds of any maturity we like. We use observed prices of multi-period bonds to estimate, in a log-linear theoretical setting, the pricing kernel that gave rise to them. The high-order dynamics of our estimated kernel help to explain why first-order, one-factor models of the term structure have had difficulty reconciling the shape of the yield curve with the persistence of the short rate. We use the estimated kernel to provide a new perspective on Hansen-Jagannathan bounds, the price of risk, and the pricing of bond options and futures.

Taxes and the Global Allocation of Capital

Despite enormous growth in international capital flows, capital-output ratios continue to exhibit substantial heterogeneity across countries. We explore the possibility that taxes, particularly corporate taxes, are a significant source of this heterogeneity. The evidence is mixed. Tax rates computed from tax revenue are inversely correlated with capital-output ratios, as we might expect. However, effective tax rates constructed from official tax rates show little relation to capital -- or to revenue-based tax measures. The stark difference between these two tax measures remains an open issue.

Cracking the Conundrum

From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25%, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic and financial market volatility, more predictable monetary policy, and the state of the business cycle.

Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods

We examine the possibility that nontraded goods may account for several striking features of international macroeconomic data: large, persistent deviations from purchasing power parity, small correlations of aggregate consumption fluctuations across countries, and substantial international real interest rate differentials. A dynamic, exchange economy is used to show that nontraded goods in principle can account for each of these phenomena. In the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates, but we find little evidence for this relation in time series data for eight OECD countries.consumption correlations, purchasing power parity, real exchange rates

Exotic Preferences for Macroeconomists

We provide a user's guide to exotic' preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risk-sensitive and robust control, hyperbolic' discounting, and preferences over sets ( temptations'). We apply each to a number of classic problems in macroeconomics and finance, including consumption and saving, portfolio choice, asset pricing, and Pareto optimal allocations.

Dynamics of the trade balance and the terms of trade: the S-curve

We provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in the terms of trade, but positively correlated with past movements. We document these same properties in a two-country stochastic growth model in which trade fluctuations reflect, in large part, the dynamics of capital formation. We find that the general equilibrium perspective is essential: The relation between the trade balance and the terms of trade depends critically on the source of fluctuations.Balance of trade

Relative price movements in dynamic general equilibrium models of international trade

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net exports. We highlight aspects of the theory that are critical in determining these properties, contrast our perspective with those associated with the Marshall-Lerner condition and the Harberger-Laursen-Metzler effect, and point out features of the data that have proved difficult to explain within existing dynamic general equilibrium models.International trade