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Monetary Policy Rules and the Forward Discount Bias

Author

Listed:
  • Min-Yong Shin

    (LG Economic Research Institute)

  • Taehwan Yoo

    (Mokpo National University)

Abstract

This is an attempt to explain forward discount bias in the foreign exchange market as influenced by monetary policy rules. A government response function to external shocks is combined with the monetary model for exchange rate determination, and the risk premium is assumed to follow a first order autoregressive process. The forward discount bias is more probable when the government is concerned with interest rate or money supply stability than when monetary policy focuses on the stabilization of foreign exchange rate or price level. These results are consistent with the experiences of ERM in the past-where forward discount bias is not found-and the survey results of Froot and Thaler (1990).

Suggested Citation

  • Min-Yong Shin & Taehwan Yoo, 2006. "Monetary Policy Rules and the Forward Discount Bias," Korean Economic Review, Korean Economic Association, vol. 22, pages 299-317.
    • Handle: RePEc:kea:keappr:ker-200612-22-2-05
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    References listed on IDEAS

    as
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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