 New Zealand's foreign exchange market and the nature of expectationsNew Zealand Economic Papers, 2000, vol. 34, issue 2, 221-241 Abstract: This paper confirms the forward premium puzzle, or the failure of uncovered interest parity, in New Zealand's foreign exchange market. The rejection of the risk-neutral rational expectations hypothesis is traced to two sources. First, there is evidence of a time-varying and possibly non-stationary risk premium in the forward market, and this premium appears related to volatility in the spot NZD market. Second, survey data is used to show that exchange rate expectations are not rational. The paper speculates that exchange rate expectation errors may be related to systematic errors in forecasting inflation or the stance of monetary policy. Exchange rate expectations are revised following inflation 'surprises' but these inflation surprises themselves show systematic patterns and therefore rationality of inflation expectations can also be rejected. There is also evidence that a lack of full credibility of the central bank's inflation targeting regime may have affected inflation expectations, and therefore be a factor in the apparently non-rational behaviour of the forward market. Date: 2000 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:nzecpp:v:34:y:2000:i:2:p:221-241 Ordering information: This journal article can be ordered from DOI: 10.1080/00779950009544324 Access Statistics for this article New Zealand Economic Papers is currently edited by Dennis Wesselbaum More articles in New Zealand Economic Papers from Taylor & Francis Journals |
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