Government Policies and International Asset Return Dynamics award

The purpose of this research is to examine the effect of various government policies on international asset returns, including exchange rates. The first project analyizes whether problems similar to what has occurred recently with the peso which arise from monetary policy changes can explain anomalous behavior in the interest rate term structure. It is postulated that monetary policy affects the stochastic process underlying interest rates and exchange rates in such a way that it induces econometric inference problems. The second project examines monetary policy in the U.S. and Germany proposing non-linear policy rules for both countries. The dynamic effects of policy shocks on real and nominal exchange rates and interest rate differentials and their predictability are examined both in the context of a non-linear vector autoregressive setting and in the context of an equilibrium model. The third proposed project focuses on real exchange rates in the context of a dynamic economy with non-traded goods, in particular houses. The main issue addressed is the relative variability of real and nominal exchange rate changes versus inflation rates. A final issue to be examined is the effect of government policies on the degree of integration of emerging equity markets with global capital markets and on economic growth. An empirical methodology is developed to test whether financial market integration and stock market development contribute to economic growth. This project also involves the development of new and better indicators of financial market integration and stock market development for a set of developing countries.