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The puzzle that just isn't

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  • Christian Mueller-Kademann

Abstract

In his stimulating article on the reasons for two puzzling observations about the behaviour of interest rates, exchange rates and the rate of inflation, Charles Engel (2016) puts forward an explanation that rests on the concept of a non-pecuniary liquidity return on assets. Albeit intriguing the analysis struggles to account for a number of facts which are familiar to participants of the foreign exchange and bond markets. Reconciling these facts in conjunction with a careful dissection of the "puzzle" to begin with, shows that the forward premium puzzle just does not exist, at least not in its canonical form.

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  • Christian Mueller-Kademann, 2016. "The puzzle that just isn't," Papers 1604.08895, arXiv.org.
    • Handle: RePEc:arx:papers:1604.08895
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    References listed on IDEAS

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    1. Jian Wang, 2008. "Why are exchange rates so difficult to predict?," Economic Letter, Federal Reserve Bank of Dallas, vol. 3(jun).
    2. Jordà, Òscar & Taylor, Alan M., 2012. "The carry trade and fundamentals: Nothing to fear but FEER itself," Journal of International Economics, Elsevier, vol. 88(1), pages 74-90.
    3. Wang, Peijie & Jones, Trefor, 2003. "The impossibility of meaningful efficient market parameters in testing for the spot-forward relationship in foreign exchange markets," Economics Letters, Elsevier, vol. 81(1), pages 81-87, October.
    4. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    5. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    6. Charles Engel, 2016. "Exchange Rates, Interest Rates, and the Risk Premium," American Economic Review, American Economic Association, vol. 106(2), pages 436-474, February.
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