Bianca De Paoli


Bianca De Paoli Bianca De Paoli Bianca De Paoli

Research interests: International Macroeconomics, Monetary Economics, Macro-Finance.

Curriculum Vitae Curriculum Vitae


Macro II



Book chapters:

Working Papers:

The forward premium anomaly refers to the empirical observation that high interest rate currencies tend to appreciate rather than depreciate as the risk-neutral uncovered interest rate parity (UIP) would imply. Part of the literature have attributed the failure of UIP to the existence of time varying foreign exchange risk premia. But resolving the forward premium puzzle requires a volatile FX risk premium that covaries negatively with the depreciation rate. This paper shows that a canonical general equilibrium small open economy model with consumption based external habit formation can only generate such a FX premium under certain assumptions namely: Households need to have slow-moving habits as well as incur very persistent output shocks. The results are shown to be independent of the origin of shocks. Moreover, the introduction of mechanisms that increase exchange rate volatility also help reconcile such puzzle.