Working Paper: NBER ID: w9948
Authors: Nelson C. Mark; Youngkyu Moh
Abstract: This paper presents a model of exchange rate determination in which the forward premium anomaly emerges as the result of unanticipated central bank interventions in the foreign exchange market. Deviations from uncovered interest parity (UIP) therefore represent neither unexploited profit opportunities nor compensation for bearing risk. In simulations, the model generates a forward premium anomaly and matches several other notable features of US-German data. Additional empirical support is obtained from an analysis of Fed and Bundesbank interventions in the dollar--DM market where it is found that the forward premium anomaly intensifies during those times when a central bank intervenes.
Keywords: exchange rate determination; forward premium anomaly; central bank interventions
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unanticipated central bank interventions (F31) | forward premium anomaly (F31) |
| Timing of interventions (C41) | forward premium anomaly (F31) |
| forward premium anomaly (F31) | observed deviations from UIP (F31) |
| Intervention periods (C41) | deviations from UIP (F29) |
| Dollar-DM market (F31) | forward premium anomaly during intervention periods (F31) |
| Dollar-yen market (F31) | forward premium anomaly intensifies during interventions (F31) |
| Magnitude of interest differential (E43) | likelihood of interventions (I24) |