Official Interventions and Occasional Violations of Uncovered Interest Parity in the Dollar-DM Market

Abstract

This paper presents a model of exchange rate determination in which the forward premium anomaly emerges as the result of unanticipated central bank interventions in the foreign exchange market. Deviations from uncovered interest parity (UIP) therefore represent neither unexploited profit opportunities nor compensation for bearing risk. In simulations, the model generates a forward premium anomaly and matches several other notable features of US-German data. Additional empirical support is obtained from an analysis of Fed and Bundesbank interventions in the dollar—DM market where it is found that the forward premium anomaly intensifies during those times when a central bank intervenesForward premium anomaly, foreign exchange intervention