“The New Fama Puzzle”

or “Do you really know what Uncovered Interest Parity is, and whether it holds?” Published as of today in IMF Economic Review, with coauthored with Laurent Ferrara (SKEMA Business School), Matthieu Bussière (Banque de France), and Jonas Heipertz (Columbia Business School):

Paper discussed in this blogpost.

So if you think you have a guess about what exchange rates will do over the next three months, based on the graph below, read the paper before betting…



37 thoughts on ““The New Fama Puzzle”

  1. Moses Herzog

    I have a little bit of gambler in me. If you’re asking us to try and predict a single country, I might take the challenge. If you’re asking us to do all 5 in the FRED graph, I would wuss out and say “too many moving parts”.

  2. Moses Herzog

    I’ll give you another one of my nonsensical ramblings here. Just to reinforce Menzie’s thoughts of how full of garbage I am (half-joking).

    To me, even with a Bachelor’s in finance and knowing EMH and arbitrage and all this garbage, It’s really utterly ridiculous to think these things would “match’ “correlate”, have “parity” in an exact fashion. In other words, this “puzzle” will always be there, into the foreseeable future (I really wanna almost say the “puzzle” will be there indefinitely, as it really doesn’t strike me as a “puzzle” as such). You know the one that gets me?? How savers or depositors can tolerate negative nominal interest rates. Now there is an F’ing mystery/puzzle.

  3. macroduck

    If the world of foreign exchange has switched from not-Fama to Fama, then we can reasonably expect to use interest-rate differentials to predict fx rates, until we can’t?

    Congratulations on a job well done.

    1. Moses Herzog

      I haven’t read the entire paper yet, you probably already have, but I think a BIG “takeaway” from the paper Menzie gives near the beginning, in the 2nd footnote of the entire paper. I never get around to read all these papers as I intend to, but I think those papers mentioned in footnote 2 are probably packed with some gems on the “puzzle”.

  4. macroduck

    Off topic, from a new PIIE report:

    “But there is another, unappreciated risk to global food security. China has also ordered its firms to stop selling fertilizer to other countries, in order to preserve supplies at home. Its little-noticed steps, which began last summer, were forcing farmers worldwide to leave fields fallow long before Russia invaded Ukraine.”

    “China’s reflexive self-interest is too often to select the policy that sharply disrupts its trade flows, exacerbating price pressures in other countries, along with the headaches they produce.”

    “The trouble with China is that it continues to act like a small country. Its policies often have the desired effect at home—say, reducing input costs to industry or one set of Chinese farmers or by increasing returns to another. But they can also be beggar-thy-neighbor, with China selecting the policy that solves a domestic problem by passing along its cost to people elsewhere.”


    1. macroduck

      I wonder whether ltr’s recent long quotes from Chinese press outlets which sing the praises of China’s role in feeding the world (?) wasn’t an attempt to front-run the PIIE report.

      1. Moses Herzog

        I was about to write a comment to you saying that I thought PIIE’s statement melodramatic. Then I found these two links:


        Even for the U.S. government, $250 million strikes me as showing it as of major importance.

        But, I tell you, if it’s anything that shows poor taste and low social graces, it’s Reuters using a famous line from Seinfeld for bathroom humor. I would never stoop so low, and thank goodness, Menzie is here to vouch for me on this.

        1. macroduck

          PIIE probably was a bit over the top. I can think of a couple of reasons he authors would load up on adjectives other than just wanting to make a splash. One is that China muzzles international organizations and this is an effort to counterbalance the bland stuff those organizations are forced to publish in the face of China’s adhere to rules it agreed to.

          The other is that China is imposing its way of doing things, a big country behavior, whle behaving “like a small country.” The authors may want to say that China needs to grow up before taking on a position of leadership. Respect for the rule of paw before imposing one’s own set of paws. Calvinball is not a good model for relations between countries.

          1. AndrewG

            Yes, China’s not being a team player, but before the Great Moderation and even after that (in areas like trade) the US (the leading big country) was very bad about meeting domestic goals, the international community be damned. During the interwar period, they let the gold in and hoarded it (you’re supposed to lower rates to let gold out, not fool with exchange rates by other means). Had to bail out the pound once or twice, but otherwise sat on their pile of gold. During Bretton Woods, they exploited their “exorbitant privilege” until the system blew up. And in terms of trade, even before Trump, the US would abuse the system to protect specific interests.

            That’s not to excuse China, but the US has hardly been “grown up.” This is the significance of the inability to make the “small country” assumption: “big” countries can throw their weight around without much blowback, so they likely will.

          2. Moses Herzog

            I been trying to piece together which country you are from Andrew. Is it Britain?? Your tone kind of reminds me of Britons upset they were deemed 2nd rate after around 1942. You guys just can’t heal that bruise on your ego can you??

        2. macroduck

          By the way, China reportedly plans to use infrastructure spending to goose grow:


          This is, of course, an effort to employ increased demand to deal with the effects of decreased supply (Covid lockdowns) as well as decreased demand (struggling residential real estate). China is different from the U.S. in this regard, in that China’s prior rounds of infrastructure-based stimulus produced a substantial infrastructure overhand; China has too much infrastructure, the U.S. too little.

          Xi has reportedly argued that China’s infrastructure is not suited to future need, which could mean he has seen the error of infrastructure as a growth engine without much thought about social return. Problem is, Xi has shown less understanding of economics and planning than his predecessors.

          Or maybe he was just trying to engineer a reduction in capital flight in the short run. Yuan stable, stocks up today. Copper steady, so maybe he’s been heard in commodity markets, too.

          1. Moses Herzog

            @ Macroduck,
            Regarding your comment farther up, it does seem like a big coincidence this China apologist was discussing the global food issue not terribly long ago. But at the same time, there’s hardly any topic the China propagandists can’t turn into a positive. It’s “strange” how good Beijing has gotten at pretending the government makes zero errors. They’ve gotten so good at the “Are you going to believe me or your lying eyes” game after making a full-time racket out of it.

            I think on some rare occasions Menzie has brought up the fact that people here on the blog (at least during MAGA days) seem to get more angry at China for the same things the Russian government does. It really is similar. A general populace of very gracious and kind people ruled by rotten eggs at the apex.

          2. AndrewG

            “Or maybe he was just trying to engineer a reduction in capital flight in the short run.”

            One way to get interest rates up.

            The thing is, China is still a developing nation. Lags and corruption/bad incentives aside, more infrastructure spending might be a good idea. (Or, it could turn into another Evergrande. There’s a name you won’t hear from ltr.)

  5. Barkley Rosser

    Congratulations to Menzie on this publication. This was the topic on which he spoke when he presented his seminar at James Madison University back in February to which you all were invited, an invitation not taken up by any of you.

  6. ltr


    April 27, 2022

    Chinese mainland records 1,824 new confirmed COVID-19 cases

    The Chinese mainland recorded 1,824 new confirmed COVID-19 cases on Tuesday, with 1,818 linked to local transmissions and 6 from overseas, according to data from the National Health Commission on Wednesday.

    A total of 12,474 new asymptomatic cases were also recorded on Tuesday, and 225,249 asymptomatic patients remain under medical observation.

    Confirmed cases on the Chinese mainland now total 207,081 with the death toll at 4,876.

    Chinese mainland new locally transmitted cases


    Chinese mainland new imported cases


    Chinese mainland new asymptomatic cases


  7. pgl

    I have never been a fan of Steve Scalise or Kevin McCarthy but give them credit for calling out Matt Gaetz:


    BTW – Gaetz committed more crimes than just threatening fellow Republicans. This clown is doing underage prostitutes without paying for it as he is giving away Congressional favors to rich friends who pay off these prostitutes. And in Trump’s sick and corrupt Republican Party, this is considered a good thing.

  8. ltr


    April 27, 2022

    China reports current account surplus in Q1

    BEIJING — China maintained a balance in its international payments in the first quarter of this year, with a reasonable level of current-account surplus, the State Administration of Foreign Exchange said Wednesday.

    The country reported a current account surplus of 89.5 billion U.S. dollars in the first three months, accounting for 2.1 percent of its gross domestic product during the period, data from the administration showed.

    During the period, trade in goods reported a surplus of 145 billion U.S. dollars, hitting an all-time high. Goods exports and imports respectively rose 16 percent and 15 percent, year on year.

    The trade in services saw a lower deficit of 18.2 billion U.S. dollars, down 30 percent, year on year.

    The administration also noted that the country saw a relatively high foreign direct investment inflow in the period, while outbound direct investment remained stable.

    1. ltr


      April 15, 2022

      Current Account Balance as percent of Gross Domestic Product for Brazil, China, France, Germany, India, Indonesia, Japan, Turkey, United Kingdom and United States, 2007-2021


      Brazil ( – 1.7)
      China ( 1.8)
      France ( – 0.9)
      Germany ( 7.4)
      India ( – 1.6)

      Indonesia ( 0.3)
      Japan ( 2.9)
      Turkey ( – 1.8)
      United Kingdom ( – 2.6)
      United States ( – 3.5)

  9. Moses Herzog

    Could be an exciting day for Uncle Moses, late afternoon today (Friday) kids.

    If you see Uncle Moses flying through the air on your TV screen at 130 mph, make sure to wave back at me on your TV monitor and yell “Bye loser !!!!!!!”

    If you want to watch some of the excitement (possible tornado funnels live, roughly 30% chance) You can try to find the internet stream for channels “KOCO” or “KFOR” around 5:30 pm central time. Happy sadist viewing (joke, there’s no sin in being fascinated by tornado funnels and storm cloud formations, many people are)

    1. Moses Herzog

      Well, this morning they are saying they don’t think “the cap” will break (weather nerds will know the meaning), so appears Uncle Moses was getting melodramatic. Maybe more like 10% chance in my area. Might see something in Kansas though. Who knows?? You meed multiple characteristics or conditions present to get tornados, and it looks like we’re “1 jet stream short” of getting a couple tornadoes on the dry line. Good news.

      1. Barkley Rosser


        Two days ago there was a tornado here in the Shenandoah Valley about 20 miles south of where I am. It ran for six miles. Did not injure or kill anybody or destroy any buildings, but a lot of power outages and some fairly severe building damage. We get them in the Valley here only very rarely.

        1. Moses Herzog

          I suspect because of climate change, you may see more of these. If you look at maps going back over many years “tornado alley” is slowly shifting more north. I think they will still be sparse where you are, but I think they will increase. I’m in the middle of wanting to blather about something else right now, but I will try to post a visual graphic later today in this thread that will maybe show what I am talking about. For your area, probably still a small worry. Most of the time, not always, but most of the time the big factor is the jet stream, because you need the jet stream in the general vicinity (think kind of small region or portion of a state for a particular “event”) to get the air rotation actually needed for a tornado. You can have “spin up” tornadoes without the jet stream, but they tend to be rare and short-lived.

          The “ideal” is what you had, where you can enjoy the visual awe of the tornado without anyone getting hurt. They have a mesmerizing quality to them, IMO, when they aren’t threatening your house or family.

        2. Moses Herzog

          OK, this isn’t exactly the map representation I was looking for, I’m sure the maps are on NOAA somewhere, but NOAA is a monolith of links and data (and some links with similar names but very different info) and I am just too lazy to click on 50 links to find what I wanted to show you. So I will first tell you I was wrong, tornado alley is shifting more east and south, not north (I think I had had this false impression in my head because I remembered a lot more action in Kansas and Iowa, then we had gotten the last roughly 2 years). This 2016 dated Perdue U link explains some of that:

          Now, if you look at Figure 4 of this 2018 paper (a different paper than the one mentioned in the Perdue link) You will find a visual representation of how Tornado alley is changing. It’s not as good as looking at the maps year-to-year-to-year, but if you were to look at a single visual representation of how “tornado alley” is changing to “dixie alley”, that map in Figure 4 is pretty damned good. You can DL it also

        3. Moses Herzog

          BTW, they don’t have to be tornadoes yet to be mesmerizing. There are different terms for this, some of them escape me at the moment. But one term you will hear is “supercell”.

          If you see a hook echo on a TV radar, or internet radar, near to your town (say 10 miles, for example) if it’s going your direction you probably want to take shelter. It does not always mean a tornado, but it is a BIG tip-off one may form very soon. 5-10 miles headed your way~~time to take action for yourself and your family:

        4. Moses Herzog

          Another “supercell”, did not turn into a tornado, Langston Oklahoma, April 23.

          When you are in a tornado “watch” (potential, but maybe not there yet) these can be scary, this is where “lowerings” come from, or “wall clouds”, which then a tornado can pop down from pretty quickly (you can also have “scud clouds” which, in essence are “small” wall clouds, which can be “false alarms” but seen when weather is getting close to tornadic), often depending on rotation in the upper levels of that “supercell” (rotations often “made” or “helped” by the jet stream). scud clouds or “looser” and don’t rotate, wall clouds tend to rotate and become “tighter” or more condensed.

          In short, especially if you are not used to this type severe weather, it’s easy to confuse a scud cloud with a wall cloud. But they are in fact, pretty different. But for novices, it can be tricky, visually, to know which is which. rotation is the big alarm, especially if the rotation is “tight”.

  10. Moses Herzog

    Can someone show this paper to Larry “I’m Never Wrong” Summers, and Johnny “I’m Good at Finance So I ‘MUST’ be Good At Economics” Cuckrant??

    The two of these self-appointed geniuses think that Covid-19 checks from the USA government are causing 15.1% inflation in Europe over the last 3 months. It seems strange, since large chunks of those Covid-19 checks were already spent, months ago, but it’s Summer’s and Cuckrant’s false narrative, and they’re sticking to it.

  11. Moses Herzog

    Is anyone else getting the sixth sense Monday’s markets could be a hellish ride for equities?? This is roughly the time in the market when banks/brokers/dealers phone up their dumbest retail investors “Boy, have I got a deal for you.” and leave them holding the bag. You now, like any good SIFMA member would do. It’s referred to among fiduciary folks as “Here, you hold this, dumb-A$$”

Comments are closed.