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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
JEL(s): F31
Programme Areas: International Macroeconomics
Link to this Page: www.cepr.org/pubs/dps/DP1090.asp
Purchase Options: An electronic copy of this Discussion Paper is available to purchase on request for £3. To order a copy, pease email orders@cepr.org.


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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