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This document presents a unified theory of bond and currency markets using an external habit model with heteroskedastic consumption growth. The model can reproduce key domestic bond market puzzles like upward/downward sloping yield curves and violations of the expectation hypothesis. It can also explain international puzzles like violations of uncovered interest rate parity. Positive and negative consumption shocks impacting habit differently allow the model to match imperfect correlations between consumpti

Author

datsno

Language

EN