Can Fluctuations in the Consumption-Wealth Ratio Help to Predict Exchange Rates?
Jorge Selaive () and
Vicente Tuesta ()
No 2005-002, Working Papers from Banco Central de Reserva del Perú
It is well documented that macroeconomic fundamentals are little help in predicting changes in nominal exchange rates compared to the predictions made by a simple random walk. Lettau and Ludvigson (2001) find that fluctuations in the common long-term trend in consumption, asset wealth, and labor income (hereby, consumption-wealth ratio) is a strong predictor of the excess returns. In this paper, we study the role of the consumption-wealth ratio in predicting the change in the nominal exchange rate of a large set of countries. We find evidence that fluctuations in the consumption-wealth ratio help to predict in-sample all the currencies. In terms of out-of-sample forecasts, our results suggest that the consumption-wealth ratio may play a significant role at predicting the Canadian dollar at all horizons and at short-intermediate horizons for some currencies.
Keywords: Exchange Rates; Consumption-Wealth Ratio; Predictability (search for similar items in EconPapers)
JEL-codes: C52 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-ifn and nep-rmg
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Journal Article: Can fluctuations in the consumption-wealth ratio help to predict exchange rates? (2006)
Working Paper: Can Fluctuations in the Consumption-Wealth Ratio Help to Predict Exchange Rates? (2004)
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