The Forward Premium Puzzle Revisited:
The forward premium is a notoriously poor predictor of exchange rate movements. This failure must reflect deviations from risk neutrality and/or rational expectations. In addition, a mechanism is needed that generates the appropriate correlation between the forward premium and shocks arising from ri...
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| Main Author: | |
|---|---|
| Format: | Electronic eBook |
| Language: | English |
| Published: |
Washington, D.C
International Monetary Fund
2002
|
| Series: | IMF Working Papers
Working Paper No. 02/28 |
| Online Access: | UBW01 UEI01 LCO01 SBR01 UER01 SBG01 UBG01 FAN01 UBT01 FKE01 UBY01 UBA01 FLA01 UBM01 UPA01 UBR01 FHA01 FNU01 BSB01 TUM01 Volltext |
| Summary: | The forward premium is a notoriously poor predictor of exchange rate movements. This failure must reflect deviations from risk neutrality and/or rational expectations. In addition, a mechanism is needed that generates the appropriate correlation between the forward premium and shocks arising from risk premia or expectations errors. This paper extends McCallum (1994) to show how such a correlation can arise from the response of monetary policy to output and inflation, which are in turn affected by the exchange rate. The theoretical models considered all generate results that are consistent with the forward premium being a biased predictor of short-term exchange rate movements; the bias decreases, however, as the horizon of the exchange rate change lengthens. Another common feature of the models is that the true reduced-form equation for exchange rate changes contains variables other than the interest differential, providing a justification for ""eclectic"" relationships for forecasting exchange rates. The results, however, remain consistent with using uncovered interest parity as a building block for structural models |
| Physical Description: | 1 Online-Ressource (39 p) |
| ISBN: | 1451844670 9781451844672 |
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| series2 | IMF Working Papers |
| spelling | Meredith, Guy Verfasser aut The Forward Premium Puzzle Revisited Meredith, Guy Washington, D.C International Monetary Fund 2002 1 Online-Ressource (39 p) txt rdacontent c rdamedia cr rdacarrier IMF Working Papers Working Paper No. 02/28 The forward premium is a notoriously poor predictor of exchange rate movements. This failure must reflect deviations from risk neutrality and/or rational expectations. In addition, a mechanism is needed that generates the appropriate correlation between the forward premium and shocks arising from risk premia or expectations errors. This paper extends McCallum (1994) to show how such a correlation can arise from the response of monetary policy to output and inflation, which are in turn affected by the exchange rate. The theoretical models considered all generate results that are consistent with the forward premium being a biased predictor of short-term exchange rate movements; the bias decreases, however, as the horizon of the exchange rate change lengthens. Another common feature of the models is that the true reduced-form equation for exchange rate changes contains variables other than the interest differential, providing a justification for ""eclectic"" relationships for forecasting exchange rates. The results, however, remain consistent with using uncovered interest parity as a building block for structural models Online-Ausg Ma, Yue Sonstige oth http://elibrary.imf.org/view/IMF001/06991-9781451844672/06991-9781451844672/06991-9781451844672.xml Verlag URL des Erstveröffentlichers Volltext |
| spellingShingle | Meredith, Guy The Forward Premium Puzzle Revisited |
| title | The Forward Premium Puzzle Revisited |
| title_auth | The Forward Premium Puzzle Revisited |
| title_exact_search | The Forward Premium Puzzle Revisited |
| title_exact_search_txtP | The Forward Premium Puzzle Revisited |
| title_full | The Forward Premium Puzzle Revisited Meredith, Guy |
| title_fullStr | The Forward Premium Puzzle Revisited Meredith, Guy |
| title_full_unstemmed | The Forward Premium Puzzle Revisited Meredith, Guy |
| title_short | The Forward Premium Puzzle Revisited |
| title_sort | the forward premium puzzle revisited |
| url | http://elibrary.imf.org/view/IMF001/06991-9781451844672/06991-9781451844672/06991-9781451844672.xml |
| work_keys_str_mv | AT meredithguy theforwardpremiumpuzzlerevisited AT mayue theforwardpremiumpuzzlerevisited |