A Consumption-Based Approach to Exchange Rate Predictability

Jair Ojeda-Joya

No 12339, Borradores de Economia from Banco de la Republica

Abstract: This paper provides evidence of short-run predictability for the real exchange rate by performing out-of-sample tests of a forecasting equation which is derived from a consumption-based asset pricing model. In this model, the real exchange rate is predictable as a result of the implications of preferences with habit persistence on the pricing of international assets. The implied predictors are: domestic, US and world consumption growth. Empirical exercises show evidence of short-term predictability on the bilateral rates of 15 out of 17 countries vis-à-vis the US over the post Bretton-Woods float. A GMM estimation of the parameters of the model also finds evidence of the presence of habits in consumers’ preferences.

Keywords: Exchange rates; out-of-sample; predictability; asset pricing; habits (search for similar items in EconPapers)
JEL-codes: C5 F31 F47 G15 (search for similar items in EconPapers)
Pages: 27
Date: 2014-12-12
New Economics Papers: this item is included in nep-for
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Citations: View citations in EconPapers (1)

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http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_857.pdf

Related works:
Working Paper: A consumption-based approach to exchange rate predictability (2019)
Working Paper: A Consumption-Based Approach to Exchange Rate Predictability (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000094:012339

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