THE TRADE BALANCE AND EXCHANGE RATES
155
individuals seek to cash in on this by exchanging domestic
deposit for foreign currency deposits.
19.
The estimates are OLS estimates, which are problematic
as the data are non-stationary. Thus, researchers prefer
to estimate
E
e
-
E
=
F
-
E
, or
E
t
(
E
t
)
=
F
t
-
E
t
,
which
leads to estimating
E
t
+
1
=
+
(
F
t
-
E
t
)
+
t
+
1
. This
yields bad results for the theory with a negative sign for
. This
negative
is referred to as the “forward premium
puzzle.” For more on this see Ken Froot and Richard Thaler, “
Anomalies: Foreign Exchange,” ...
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