Eleonora Granziera, Markus Sihvonen, 26 November 2020

High short-term interest rates predict domestic currency appreciation and low excess returns for long-term bonds. These facts are at odds with two textbook conditions describing the relationship between different maturity interest rates and exchange rates: uncovered interest parity (UIP) and the expectations hypothesis. This column explains that both conditions can be reconciled with the data if agents are assumed to have sticky rather than perfectly rational expectations concerning short rates. It also demonstrates how this empirically motivated change in model assumptions has broad implications for interpreting the effects of monetary policy on exchange rates and yield curves.  

Jiri Slacalek, 05 December 2019

Many economic models assume that households have up-to-date information. This column relaxes this assumption to see how this affects consumption at the household and aggregate level. A model that assumes that households only occasionally update their information about macroeconomic quantities better fits the micro and macro data, and can explain the fact that consumption reacts little to the announcement of a fiscal stimulus but substantially to the actual receipt of a stimulus payment.

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