BPEA | 1985 No. 1

Comments and Discussion

1985, No. 1

Christopher Sims expressed skepticism about the way Jeffrey Frankel
had used the mean-variance approach to assess the importance of
variations in risk premiums in explaining exchange rate movements. In
Sims’s view it is inappropriate to assume that the risk characteristics of
U.S. debt are invariant to changes in fiscal policy, particularly when one
is trying to assess the consequences of the projected stream of structural
federal budget deficits. Fear of an impending apocalypse of the kind
described by James Tobin would change agents’ perception of the relative
riskiness of different assets-risk parameters estimated from historical
data underestimate the current risk on government bonds.