Foreign Exchange Risk Premium: Does Fiscal Policy Matter?: Evidence from Italian Data
39 Pages Posted: 15 Feb 2006
There are 2 versions of this paper
Foreign Exchange Risk Premium: Does Fiscal Policy Matter?: Evidence from Italian Data
Foreign Exchange Risk Premium: Does Fiscal Policy Matter? Evidence from Italian Data
Date Written: March 1997
Abstract
This paper challenges the conventional view that foreign exchange risk premiums are small, not volatile, and unrelated to macroeconomic variables. For the Italian lira (1987-94), unconditional risk premiumsconstructed using survey data to measure exchange rate expectationsare found to be sizable (relative to the dimension of the forward premium), highly volatile (relative to the variability of the forward bias), and predictable. Estimation of structural models of the risk premium suggests that anticipated fiscal contractions in Italy and lower uncertainty about the future path of fiscal policy are associated with a lower risk premium on lira-denominated assets.
Keywords: Risk Premium, Fiscal Policy, Survey Data, Italy
JEL Classification: F31, G1, H6, C42
Suggested Citation: Suggested Citation
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