Research Papers Porntawee Nantamanasikarn Foreign Central Banks and U.S. Bond Risk Premia (job market paper) This paper studies the relationship between foreign official purchases of U.S. government bonds and bond risk premia. I run regressions of one-year ahead excess returns of U.S. government bonds on foreign official purchases, among other control variables. I find that foreign official purchases have predictive power for excess returns on two- to five-year bonds, but have no predictive power for excess returns on six- to ten-year bonds. During 1981–2006, foreign official purchases forecast, on average, that future excess returns would be lowered by about 15 percentage points for two-year bonds and about 30 percentage points for five-year bonds. The predictive power of foreign official purchases is robust to the exclusion of the recent period of high level of purchases (2001-2006). The result is consistent with the behavior of foreign central banks in which almost 75% of their total long-term Treasury securities holdings mature in less than five years. Therefore, they are unlikely to be the main culprit for the recent low long-term (ten-year) interest rates. Imperfect Common Knowledge, Price Stickiness, and Inflation Inertia This paper proposes a heterogeneous information model in which firms’ dynamic pricing decisions require an infinite hierarchy of expectations of others’ expectations (higher-order expectations). In particular, firms’ expectations of future prices depend on their view of the pricing decisions by other market participants. I sidestep the infinite regress problem by assuming that firms have limited depth of reasoning—they can form higher-order expectations only for a limited number of iterations. In contrast to the standard New Keynesian model, the Limited Depth of Reasoning model proposed here generates realistic inflation inertia and a positive correlation between inflation and output using plausible parameter values for the persistence of monetary shocks. U.S. Home Prices and Fundamentals: Evidence from Long-Term U.S. and Local Markets This paper studies the long-run relationship between home prices and fundamentals. First, I test for cointegration among U.S. home prices, building costs, per capita consumption, population, and the interest rate using century-long data (1890–2006). Second, I apply Bai and Ng's (2004, Econometrica) PANIC analysis to test for a unit root in real home prices and real per capita income using a panel of 106 MSAs during 1980–2005. Third, I test for cointegration between home prices and fundamentals for 106 MSAs, using Bai and Carrion-i-Silvestre's (2005, mimeo) panel cointegration method that controls for cross-sectional dependence by estimating unobserved common factors. I find no evidence of cointegration between home prices and fundamentals in either the long-term U.S. dataset or in a panel of local markets.