Forward Bias, Uncovered Interest Parity and Related Puzzles
University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara
Teh Forward-Bias Puzzle, failure of uncovered interest parity and related puzzles suggest that there is a fundamental failure in internatonal financial markets. Many theories attempt to explain this bias and failure. But none of them has been widely accepted; at least partly because they are not consistent with the related puzzles. The model of monetary policy in Table 6 explains the Forward-Bias Puzzle and the UIP failure without appealing to risk premia or information failures. It also explains, or is at least consistent with, the related puzzles. Finally it suggests that we need to change the way we think about UIP.
Keywords: Social and Behavioral Sciences; exchange rates; interest rates; risk premia; uncovered interest parity; forward bias; arbitrage; expectations (search for similar items in EconPapers)
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