Research Discussion Paper – RDP 8906 A Random Walk Around the $A: Expectations, Risk, Interest Rates and Consequences for External Imbalance

Contents

• Introduction
• Exchange Rate Expectations and the Forward Rate
• The Risk Premium
• Inflation and Interest Rates
• Skewness
• Discussion
• References
• Data Appendix
• Appendix A
• Appendix B
• Appendix C
• Appendix D

We are grateful to George Fane, Fred Gruen, Ian Macfarlane and Adrian Pagan for helpful suggestions, to Tony Hall for providing us with exchange rate data, to Tim Long for able research assistance and to Ron Stuart for stylistic suggestions. Views expressed in the paper are those of the authors and should not be attributed to the institutions for which they work.