Can fluctuations in the consumption-wealth ratio help to predict exchange rates?

Jorge Selaive () and Vicente Tuesta

Applied Financial Economics, 2006, vol. 16, issue 17, 1251-1263

Abstract: It is accepted that standard macroeconomic variables are not capable of predicting ex ante the majority of short term changes in exchange rates. Lettau and Ludvigson (2001) find that fluctuations in the common long-term trend in consumption, asset wealth, and labour income (hereby, consumption-wealth ratio) is a strong predictor of the excess returns. This study examines the role of the consumption-wealth ratio in predicting the change in the nominal exchange rate for seven industrialized economies. Evidence is found that fluctuations in the consumption wealth ratio help to predict in-sample all currencies. Out-of-sample, the results suggest that the consumption wealth ratio may play a significant role forecasting the Canadian dollar.

Date: 2006
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Related works:
Working Paper: Can Fluctuations in the Consumption-Wealth Ratio Help to Predict Exchange Rates? (2005)
Working Paper: Can Fluctuations in the Consumption-Wealth Ratio Help to Predict Exchange Rates? (2004)
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DOI: 10.1080/09603100500426705

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