JUAN ÁNGEL JIMÉNEZ MARTÍN () (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense de Madrid. España.) RODRIGO PERUGA URREA (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense de Madrid. España)
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The goal of this paper is to identify the main determinants of the risk premium in some European currency markets just before the EMU. To do this the authors propose an exchange rate model and derive a formula for the forward premium. This formula includes money and production variables and is quite standard, except for the inclusion of macroeconomic policy risk. This inclusion is the main theoretical contribution of the paper. Under some standard assumptions, this formula simplifies substantially and becomes amenable to regression analysis. Then, using standard measures of money and production and the interest rate swaps, which are intended to be measures of macroeconomic policy risk, the regression is estimated. This inclusion is the main empirical contribution of the paper.
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