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Fixes: Of the Forward Discount Puzzle

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Author Info
Flood, Robert P
Rose, Andrew K

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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 (EMS), the authors 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 that is dependent upon the exchange rate regime. By using the many EMS realignments, the authors are also able to quantify the 'peso problem.' Copyright 1996 by MIT Press.

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Publisher Info
Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 78 (1996)
Issue (Month): 4 (November)
Pages: 748-52
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Handle: RePEc:tpr:restat:v:78:y:1996:i:4:p:748-52

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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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