FIXES - OF THE FORWARD DISCOUNT PUZZLE

Regressions of ex post changes in floating exchange rates on appropria te interest differentials typically imply that the high-interest rate currency tends to appreciate, the ''forward discount puzzle,'' Using d ata from the European Monetary System, we find that a large part of th e forward discount puzzle vanishes for regimes of fixed exchange rates . That is, deviations from uncovered interest parity appear to vary in a way which is dependent upon the exchange rate regime. By using the many EMS realignments, we are also able to quantify the ''peso problem .''