Brunnermeier, Markus K. Merkel, Sebastian Sannikov, Yuliy
Year of Publication:
CESifo Working Paper No. 8278
Center for Economic Studies and ifo Institute (CESifo), Munich
This paper incorporates a bubble term in the standard FTPL equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inﬂation. It also provides an example with closed-form solutions in which idiosyncratic risk on capital returns depresses the interest rate on government bonds below the economy's growth rate.