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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

Abstract: 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)
Date: 2005-01
New Economics Papers: this item is included in nep-bec, nep-ifn and nep-rmg
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Related works:
Journal Article: Can fluctuations in the consumption-wealth ratio help to predict exchange rates? (2006) Downloads
Working Paper: Can Fluctuations in the Consumption-Wealth Ratio Help to Predict Exchange Rates? (2004) Downloads
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