Dimitri Vayanos (London School of Economics) - A Preferred Habitat Model of Term Premia and Currency Risk

Co-authors: Pierre-Olivier Gourinchas (Berkeley) and Walker Ray (London School of Economics) 

We propose an integrated preferred-habitat model of term premia and exchange rates, building on Vayanos and Vila (2019). Our model generates deviations from UIP and also a decreasing term structure of currency risk premia. Using our framework we explore the transmission of monetary policy to domestic and currency markets, as well as the spillovers to the foreign term premia; the effect of non-conventional monetary policy on the domestic and foreign economies; and the effect of shifts in the 'specialness' of one country's bonds or currency.

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