Monetary Policy Predicts Currency Movements

Söhnke Bartram, Mark Grinblatt and Yan Xu

No 33423, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The relative restrictiveness of a central bank’s supply of money predicts the raw and risk-adjusted returns of its currency—both next month and at least three years into the future. Archived data, known by currency traders at the time, estimates central bank restrictiveness as a scaling of the residual from out-of-sample panel regressions of M1 on macroeconomic variables tied to domestic and international transaction requirements. Carry’s ability to forecast currency returns is subsumed by the central bank restrictiveness signal, which also forecasts inflation.

JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-pay
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