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Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the(More)
For more than a century, diversified long-horizon investments in America's stock market have consistently received much higher returns than investors in bonds: a return gap averaging six percent per year. This is what Rajnish Mehra and Edward Prescott (1985) labeled the " equity premium puzzle " : the premium return on equities does not seem to be matched(More)
The dollarization of bank deposits and credit is widespread in developing countries, resulting in varying degrees of currency mismatches in domestic financial intermediation, which in turn might accentuate bank balance sheet fragility. It is widely argued that flexible exchange rate regimes encourage banks to match dollar-denominated liabilities with a(More)
I compare the performance of alternative monetary rules for Canada using an open economy model under incomplete markets. Different rules generate different paths for the markup and the terms of trade. A comparison of welfare levels suggests that flexible inflation targeting, the Bank of Canada's current policy, dominates strict targeting rules—among which a(More)
The negative balance sheet effect of currency depreciation is believed to play an important role in the development of economic crises. However, a series of firm-level studies have failed to discover evidence of this negative effect. This paper uses a sample of non-financial firms in Asia, a region where the importance of the balance sheet effect is(More)
We use balance sheet and National Income and Products Accounts data to Ž. calibrate factor shares in a model with three factors land, labor, and capital and Ž. three sectors business, household, and government. These estimates are used in an overlapping generations model with land to study the long-run implications for social security. In this setup,(More)
This paper studies the political sustainability of the existing pay-as-you-go Social Security system in the face of recent demographic patterns. We analyze different approaches to privatizing the system and consider what it would require for them to be politically implementable. The analysis is based on an overlapping-generations economy where an initial(More)