RT Report
T1 Macroeconomic and policy uncertainty and exchange rate risk premium
A1 Jiménez Martín, Juan Ángel
A1 Peruga Urrea, Rodrigo
AB The goal of this paper is to identify the main determinants of the risk premium in some European currency markets just before the EMU. To that extent, we start from Lucas (1982) exchange rate model and derive an analytical expression for the forward premium. This expression includes money and production variables and it is quite standard, except for the inclusion of macroeconomic policy risk. Under some standard assumptions, this formula simplifies substantially and becomes amenable to regression analysis. Then, using standard measures of money and production, as well as interest rate swap spreads as indicators of macroeconomic policy risk, the theoretical expression is estimated. We provide evidence suggesting that it is policy uncertainty, much more than fundamental macroeconomic uncertainty, which determined risk premium over the convergence process to the euro. Whether these results can be extended to similar experiences for other currency unions remains open for future research.
PB Instituto Complutense de Análisis Económico. Universidad Complutense de Madrid
YR 2004
FD 2004
LK https://hdl.handle.net/20.500.14352/56614
UL https://hdl.handle.net/20.500.14352/56614
LA eng
NO JEL Classification: F31, F41, G12, G15
DS Docta Complutense
RD 7 abr 2025