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Title: Fixes: Of the Forward Discount Puzzle

Author(s): Robert P Flood and Andrew K Rose

Publication Date: December 1994

Keyword(s): EMS, Exchange Rates, Floating, Interest, Parity, Peso Problem and Uncovered

Programme Area(s): International Macroeconomics

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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Bibliographic Reference

Flood, R and Rose, A. 1994. 'Fixes: Of the Forward Discount Puzzle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1090