Accurate, Focused Research on Law, Technology and Knowledge Discovery Since 2002

You Are Here: Home » Government Documents » Systematic monetary policy and the forward premium puzzle

Systematic monetary policy and the forward premium puzzle

by on

Systematic monetary policy and the forward premium puzzle, by Demosthenes N. Tambakis and Nikola Tarashev. Working Papers No 396, December 2012

  • “Is systematic monetary policy a driver of the forward premium puzzle, i.e. the tendency of high interest-rate currencies to appreciate, thus strongly violating Uncovered Interest Parity (UIP)? We address this question by studying a battery of monetary policy rules in a small open economy that is subject to stationary but persistent domestic and foreign shocks. Each rule leads to model-implied UIP violations, which we derive analytically and then calibrate numerically. Our key finding is that only a forward-looking rule based on CPI inflation can account for frequently observed strong UIP violations.”
  • Related postings on financial system
    • LinkedIn

    Sorry, comments are closed for this post.