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Can fluctuations in the consumption-wealth ratio help to predict exchange rates?

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  • Jorge Selaive
  • Vicente Tuesta

Abstract

It is accepted that standard macroeconomic variables are not capable of predicting ex ante the majority of short term changes in exchange rates. Lettau and Ludvigson (2001) find that fluctuations in the common long-term trend in consumption, asset wealth, and labour income (hereby, consumption-wealth ratio) is a strong predictor of the excess returns. This study examines the role of the consumption-wealth ratio in predicting the change in the nominal exchange rate for seven industrialized economies. Evidence is found that fluctuations in the consumption wealth ratio help to predict in-sample all currencies. Out-of-sample, the results suggest that the consumption wealth ratio may play a significant role forecasting the Canadian dollar.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 16 (2006)
Issue (Month): 17 ()
Pages: 1251-1263

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Handle: RePEc:taf:apfiec:v:16:y:2006:i:17:p:1251-1263

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Cited by:
  1. Jorge Selaive & Pablo Pincheira B., 2008. "External Imbalances, Valuation Adjustments and Real Exchange Rate: Evidence of Predictability in an Emerging Economy," Working Papers Central Bank of Chile 460, Central Bank of Chile.

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