Template-type: ReDIF-Paper 1.0
Author-Name: Juan-Ángel Jiménez-Martín
Author-Email: juanangel@ccee.ucm.es
Author-Homepage: https://www.ucm.es/fundamentos-analisis-economico2/jajm
Author-Person: pji27 
Author-Workplace-Name: Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales 
	(Faculty of Economics and Business), Universidad Complutense de Madrid
Author-Workplace-Homepage: https://www.ucm.es/fundamentos-analisis-economico2
Author-Name: Rodrigo Peruga Urrea
Author-Workplace-Name: niversidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales.
	Dpto. de Fundamentos de Análisis Económico II. 
Author-Workplace-Homepage: https://www.ucm.es/fundamentos-analisis-economico2
Title: Macroeconomic and policy uncertainty and Exchange rate risk Premium
Abstract: 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.
Classification-JEL: F31, F41, G12, G15.
Keywords: Risk premium, Peso Problem, Macroeconomic policy risk, European monetary System.
Length: 32 pages 
Creation-Date: 2004
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae0412.txt 
File-URL: https://eprints.ucm.es/id/eprint/7726/1/0412.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:0412