How Credit Improves the Exchange Rate Forecast

Martin Casta

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: This paper presents a simple reduced-form error correction model for forecasting nominal exchange rates. The model is inspired by the classical monetary model of exchange rates. However, the commonly used monetary aggregates were replaced by loans to corporations. The reason for this change is that our goal is to focus on corporate deposits, for which corporate loans act as a proxy. For presentational purposes, we focus on eight major trading currency pairs: AUD/USD, CAD/USD, CHF/USD, EUR/USD, GBP/USD, NZD/USD, SEK/USD and JPY/USD, for which we use data from approximately the last two decades. We empirically show statistically and economically significant exchange rates forecastability in the medium and long run, and we also present some findings on predictability even in the short run. In short, our results suggest that corporate loans are a significant driver behind exchange rate movements.

Keywords: Exchange rates; forecasting; forecast evaluation (search for similar items in EconPapers)
JEL-codes: C5 F31 F32 F37 (search for similar items in EconPapers)
Date: 2022-08
New Economics Papers: this item is included in nep-fdg, nep-for, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2022/7

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