Working Paper: NBER ID: w4928
Authors: Robert P. Flood; Andrew K. Rose
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 which is dependent upon the exchange rate regime. By using the many EMS realignments, we are also able to quantify the `peso problem.'
Keywords: Uncovered Interest Parity; Forward Discount Puzzle; Exchange Rate Regimes; Peso Problem
JEL Codes: F31; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate regime (F33) | behavior of UIP deviations (J65) |
| realignment events (D79) | bias in UIP estimates (J65) |
| treatment of realignment events (C32) | accuracy of UIP estimates (C13) |