DP1090 Fixes: Of the Forward Discount Puzzle
|Author(s):||Robert P Flood, Andrew K Rose|
|Publication Date:||December 1994|
|Keyword(s):||EMS, Exchange Rates, Floating, Interest, Parity, Peso Problem, Uncovered|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1090|
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'.