Risk, policy rules, and noise : rethinking deviations from uncovered interest parity

This paper investigates why the forward premium predicts the future depreciation with the "wrong" sign and why the unobserved deviation from rational uncovered interest parity is negatively correlated with and is more volatile than the rationally expected depreciation. We examine the ability of three models to account for the data. They are, (i) the standard representative-agent asset pricing model, (ii) a model of monetary-policy with exchange-rate feedback, and (iii) a model to estimates from the literature analyzing survey expectations produces fragmentary evidence in favor of this approach.