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Exchange rate returns and external adjustment: evidence from Switzerland

Christian Grisse () and Thomas Nitschka

No 2014-12, Working Papers from Swiss National Bank

Abstract: This paper studies the ability of external imbalances to indicate subsequent exchange rate returns. We propose a simple twist of the Gourinchas and Rey (2007) approximation to the intertemporal budget constraint which is valid for countries that are net creditors (or net debtors) consistently throughout the sample. Our approach offers two advantages. First, it does not require the specification of trend shares for external assets, external liabilities, exports and imports. This avoids a potential source of measurement error and can make the approximation more accurate. Second, it can be applied to countries which have historically been simultaneously net exporters and net creditors (or equivalently net importers and net debtors) on average, with the usual assumption that the no-Ponzi condition is satisfied asymptotically. This is relevant for a number of countries, e.g. Switzerland, where the original Gourinchas and Rey (2007) approximation cannot be used. We find that measures of deviations from trends in Swiss net foreign assets and net exports provide signals for future Swiss franc nominal effective exchange rate movements, both in and out of sample.

Keywords: external imbalances; exchange rates; Swiss franc (search for similar items in EconPapers)
JEL-codes: F31 F32 F37 G15 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014
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Journal Article: Exchange Rate Returns and External Adjustment: Evidence from Switzerland (2016) Downloads
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