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Fixes: Of The Forward Discount Puzzle

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Author Info
Robert P. Flood
Andrew K. Rose

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Abstract

Regressions of ex post changes in floating exchange rates on appropriate interest differentials typically imply that the high- interest rate currency tends to appreciate, the `forward discount puzzle.' Using data from the European Monetary System, we find that a large part of the forward discount puzzle vanishes for regimes of fixed exchange rates. That is, deviations from uncovered interest parity appear to vary in a way which is dependent upon the exchange rate regime. By using the many EMS realignments, we are also able to quantify the `peso problem.'

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4928.

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Date of creation: Nov 1994
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Handle: RePEc:nbr:nberwo:4928

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F31 - International Economics - - International Finance - - - Foreign Exchange

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  1. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer. [Downloadable!] (restricted)
  2. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February. [Downloadable!] (restricted)
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