We study the purchasing power parity (PPP) puzzle in a multisector, two-country, sticky-price model. Across sectors, firms differ in the extent of price stickiness, in accordance with recent microeconomic evidence on price-setting in various countries. Combined with local currency pricing, this leads sectoral real exchange rates to have heterogeneous dynamics. We show analytically that, in this economy, deviations of the real exchange rate from PPP are more volatile and persistent than in a counterfactual one-sector world economy that features the same average frequency of price changes and is otherwise identical to the multisector world economy. When simulated with a sectoral distribution of price stickiness that matches the microeconomic evidence for the U.S. economy, the model produces a half-life of deviations from PPP of 45 months. In contrast, the half-life of such deviations in the counterfactual one-sector economy is only slightly above one year. As a by-product, our model provides a decomposition of this difference in persistence that allows a structural interpretation of the different approaches found in the empirical literature on aggregation and the real exchange rate. In particular, we reconcile the apparently conflicting findings that gave rise to the "PPP strikes back debate" (Imbs et al. 2005a,b and Chen and Engel 2005).

The literature in behavioral finance focuses on differences between participants and nonparticipants in stock markets. The large share of nonparticipants is referred as the participation puzzle. A somewhat related puzzle concerns the home bias on agents' portfolio of assets. Not only is the share of foreign assets documented to be very small but also the complete nonparticipation on foreign asset markets is quite substantial. In this paper, I look at characteristics and differences between participants and nonparticipants in the foreign asset market. I ask whether participating in the foreign stock market involves the same decision as participating in the domestic stock market and whether the same variables that explain participation in the domestic market can also explain participation in foreign markets. Using the Survey of Consumer Finance, I find that holders of foreign assets are wealthier, more educated, and less risk-averse. More importantly, these agents are more sophisticated in their sources of information. Some stylized facts from domestic asset holdings literature do not hold when talking about foreign asset holdings, such as the hump-shaped ownership across age intervals. In a model where inattentive agents update their information infrequently, I show that even a small observational cost implies large inattentiveness.

This paper analyses the management of foreign-currency-linked debt between 1994 and 2003. I estimate the optimal debt composition through a cost and risk minimization model applied to recent Brazilian data. I look at the optimal monetary policy followed by a country highly indebted in foreign currency-linked debt when facing external crises. The results suggest that the optimal composition of the public debt implies a massive use of price-linked indexed bonds. When facing an external crisis, the optimal monetary policy should be more restrictive given the high level of foreign-currency-linked debt.

This paper compares the two recent crises the Brazilian economy faced in 2002 and 1998. Once more questions whether the Brazilian government would fulfill its contracts jeopardized the composition of the publid debt. This work shows that differently from 1998, the 2002 crisis awards the label of confidence crisis.