Foreign Exchange Risk Premium: Does Fiscal Policy Matter? Evidence From Italian Data

April 1, 1997

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Format: Chicago

Lorenzo Giorgianni. Foreign Exchange Risk Premium: Does Fiscal Policy Matter? Evidence From Italian Data, (USA: International Monetary Fund, 1997) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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 premiums—constructed using survey data to measure exchange rate expectations—are 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.

Subject: Fiscal policy, Foreign exchange, Money, National accounts, Prices

Keywords: Asset prices, Currencies, Dollar risk premium, Exchange rates, Fiscal Policy, Home currency risk premium, Italy, Mark risk premium change, Mark risk premiums, Return on investment, Risk Premium, Risk premium equation, Survey Data, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1997/039
Stock No:

WPIEA0391997
ISBN:

9781451845792
ISSN:

1018-5941

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