The standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and reduces the volatility of RERs. Nevertheless, versions of the multi-sector sticky-price model of Carvalho and Nechio (2011) augmented with capital accumulation can match the persistence and volatility of RERs seen in the data, irrespective of the type of capital. When comparing the implications of capital specificity, we find that, perhaps surprisingly, switching from economy-wide capital markets to sector-specific capital tends to decrease the persistence of RERs in response to monetary shocks. Finally, we study how RER dynamics are affected by monetary policy and find that the source of interest rate persistence - policy inertia or persistent policy shocks - is key.

We combine questions from the Michigan Survey about the future path of prices, interest rates, and unemployment to investigate whether U.S. households are aware of the so-called Taylor (1993) rule. For comparison, we perform the same analysis using questions from the Survey of Professional Forecasters. Our findings support the view that some households form their expectations about the future path of interest rates, inflation, and unemployment in a way that is consistent with Taylor-type rules. The extent to which this happens, however, does not appear to be uniform across income and education levels. In particular, we find evidence that the relationship between unemployment and interest rates is not properly understood by households in the lowest income quartile, and by those with no high school diploma. We also find evidence that the perceived effect of unemployment on interest rates is asymmetric, being relevant only for interest-rate decreases. Finally, we argue that the relationships we uncover can be given a causal interpretation.

Foreign stock ownership is known to be very limited among households. Using the Survey of Consumer Finances, I show that information acquisition plays a major role in agents’ decisions to invest in foreign stocks. In particular, households that participate in foreign stock markets are better informed about their financial investment choices: they shop more for investment opportunities, update their investment portfolios more frequently, and use the Internet more often as a source of information. Households that invest in foreign stocks are also substantially wealthier and more educated. The paper considers a model that shows how information acquisition costs and fixed costs of entering a new market can affect investors’ decisions to buy foreign stocks. The model predictions match the two main features of the data: that foreign stock owners are scarce but better informed. Calibrating the model to match returns and volatility for the U.S. and foreign stocks, I show that even a small cost of entering a new market can explain the large degree of nonparticipation among households.

We study the purchasing power parity (PPP) puzzle in a multi-sector, two-country, sticky-price model. Across sectors, firms differ in the extent of price stickiness, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, this leads sectoral real exchange rates to have heterogeneous dynamics. We show analytically that in this economy, deviations of the real exchange rate from PPP are more volatile and persistent than in a counterfactual one-sector world economy that features the same average frequency of price changes, and is otherwise identical to the multi-sector world economy. When simulated with a sectoral distribution of price stickiness that matches the microeconomic evidence for the U.S. economy, the model produces a half-life of deviations from PPP of 39 months. In contrast, the half-life of such deviations in the counterfactual one-sector economy is only slightly above one year. As a by-product, our model provides a decomposition of this difference in persistence that allows a structural interpretation of the different approaches found in the empirical literature on aggregation and the real exchange rate. In particular, we reconcile the apparently conflicting findings that gave rise to the "PPP Strikes Back debate" (Imbs et al. 2005a,b and Chen and Engel 2005).

This paper analyses the management of foreign-currency-linked debt between 1994 and 2003. I estimate the optimal debt composition through a cost and risk minimization model applied to recent Brazilian data. I look at the optimal monetary policy followed by a country highly indebted in foreign currency-linked debt when facing external crises. The results suggest that the optimal composition of the public debt implies a massive use of price-linked indexed bonds. When facing an external crisis, the optimal monetary policy should be more restrictive given the high level of foreign-currency-linked debt.

This paper compares the two recent crises the Brazilian economy faced in 2002 and 1998. Once more questions whether the Brazilian government would fulfill its contracts jeopardized the composition of the publid debt. This work shows that differently from 1998, the 2002 crisis awards the label of confidence crisis.