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Macroeconomic and policy uncertainty and exchange rate risk premium Jiménez Martín, Juan Ángel Peruga Urrea, Rodrigo Risk premium Peso Problem Macroeconomic policy risk European monetary System. Econometría (Economía) 5302 Econometría JEL Classification: F31, F41, G12, G15 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. Fac. de Ciencias Económicas y Empresariales Instituto Complutense de Análisis Económico (ICAE) TRUE pub 2023-06-20T16:39:19Z 2023-06-20T16:39:19Z 2004 technical report https://hdl.handle.net/20.500.14352/56614 XXXX-XXXX eng Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE) open access application/pdf Instituto Complutense de Análisis Económico. Universidad Complutense de Madrid