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We document stylized facts about China's recent exchange rate policy for its currency, the renminbi (RMB). Our empirical findings suggest that a 'two-pillar policy' is in place, aiming to balance RMB index stability and exchange rate flexibility We then develop a tractable no-arbitrage model of the RMB under the two-pillar policy. Using derivatives data on the RMB and the U.S. dollar index, we estimate the model to assess financial markets' views about the fundamental exchange rate and sustainability of the policy. Our model is able to predict the modification of the two-pillar policy in May 2017, when a discretion-based 'countercyclical factor' was introduced for the first time. We also examine the model's ability to forecast RMB movements. JEL classification: F31, G12, G13, G15 Key words: exchange rate policy, two-pillar policy, managed float, Chinese currency, renminbi, RMB, central parity, RMB index, 1 Introduction How China manages its currency, the Renminbi or RMB, is one of the most consequential decisions in global financial markets. China has been the world's largest exporter since [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2005.10.021 Byline: Urban J. Jermann (a), Vincenzo Quadrini (b) Abstract: Together with a sense of entering a New Economy, the U.S. experienced in the second half of the 1990s an economic expansion, a stock market boom, a financing boom for new firms and productivity gains. This article proposes an interpretation of these events within a general equilibrium model with financial frictions and decreasing returns to scale in production. We show that the mere prospect of high future productivity growth can generate sizable gains in current productivity, as well as the other above mentioned events. Author Affiliation: (a) The Wharton School of the University of Pennsylvania, and National Bureau of Economic Research, USA (b) Marshall School of Business, University of Southern California, USA Article History: Received 15 September 2003; Revised 6 October 2005; Accepted 12 October 2005 Article Note: (footnote) [star] We would like to thank Gian Luca Clementi, Hal Cole, Harald Uhlig and seminar participants at the following institutions and conferences: Asset Price Bubbles conference in Barcelona, Carnegie-Mellon University, Cemfi in Madrid, Chicago Fed, Dallas Fed, Federal Reserve Board, Georgetown University, Igier-Bocconi, Midwest Macro Meeting in Nashville, Minnesota Macro Workshop, Penn State University, SED meeting in NY, SITE conference at Stanford, Summer Meeting of the Econometric Society in Los Angeles, UCLA, UCSD, University of Geneva, University of Montreal, USC, UT Austin, Wharton School and Workshop on Monetary and Macroeconomics at Philadelphia Fed. Quadrini also thanks the National Science Foundation for research support.

This paper presents a multi-country general equilibrium model driven by productivity shocks, where labor supply and consumption are chosen endogenously. We use this framework to study the effect of labor supply for optimal international diversification. We find that the model's ability to help explain home-bias depends crucially on the level of substitutability between consumption and non-working time. Quantitatively, the non-separability in the preferences helps in a nonnegligible way, but it cannot entirely explain the extreme degree of home-bias in U.S. portfolios. JEL classification: F30; G11 Keywords: International diversification; Portfolio choice; Nonseparable utility; Household production

The components of national income and product - such as consumption, investment, government purchases, exports, and imports - may be usefully viewed as nontraded assets that yield flows of 'dividends' over time. Many open questions in public finance and macroeconomic policy, such as the appropriate interest rate for discounting Social Security payments, depend critically on the risk and return properties of NIPA components. This paper presents some measurements on the risk and return of NIPA components, using the Campbell - Shiller (1988) model which assumes constant expected returns. We find that the returns to NIPA components are (i) more volatile than growth rates; and (ii) the returns to consumption, investment, and government purchases are very highly correlated with own-country output returns. The correlations between trade variables and output are weaker. Looking across countries, we find that the correlation between the returns on consumption and output are very similar to the correlation between the growth rates of these variables. Keywords: Synthetic securities; International diversification

A real business cycle model was utilized to analyze asset returns in production economies. The model, which duplicates basic business cycle facts, produced historical equity premium that combines capital adjustment costs and habit formation. The business cycle framework also identified simple habit formation preferences as a contributory factor to the existence of high equity premia.

Can the presence of nontraded consumption goods or nontraded factors of production explain the high degree of 'home bias' displayed by investor portfolios? We find that the answer is no, so long as individuals have access to free international trade in financial assets. In particular, it is never optimal to exhibit home bias with respect to domestic traded-good equities. By contrast, holdings of nontraded-good equities in an optimal portfolio will depend sensitively on the elasticity of substitution between traded and nontraded goods. Keywords: International diversification; Nontraded goods; Optimal portfolio choice