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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 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 that 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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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1090.

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Date of creation: Dec 1994
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Handle: RePEc:cpr:ceprdp:1090

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Related research
Keywords: EMS; Exchange Rates; Floating; Interest; Parity; Peso Problem; Uncovered;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange

References listed on IDEAS
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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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This page was last updated on 2009-11-24.

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