The Failure Of Uncovered Interest Parity, Forward Bias And Related Puzzles
Three puzzles are closely related to the forward-bias puzzle and the failure of uncovered interest parity: (1) UIP failure is greater for short than long maturities, (2) forward bias is larger between developed than between developing countries and (3) there is no systematic forward bias in commodity markets. A convincing explanation for these puzzles should also explain two other 'facts': (a) the time dependency of the forward bias and failure of UIP and (b) that UIP holds better under a gold standard than under flexible rates. A combination of covered interest parity and monetary policy provides the best available explanation.
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