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Fixes: Of the Forward Discount Puzzle

Robert P. Flood^1,2; Andrew K. Rose³

¹ International Monetary Fund · ² National Bureau of Economic Research · ³ University of California - Haas School of Business

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.

DOI

10.2307/2109962

Volume

78 (4)

Pages

748

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