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Liquidity yield and exchange rate predictability

Author

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  • Chen, Shiu-Sheng
  • Chou, Yu-Hsi

Abstract

In this paper, we extend the Taylor rule model of exchange rate determination by incorporating the liquidity yield on government bonds, and investigate exchange rate predictability from the augmented Taylor rule model. We find that the liquidity yield on government bonds delivers additional predictive power to future exchange rate movements beyond the model with Taylor rule fundamentals, using both in-sample and out-of-sample tests. In particular, the augmented model with liquidity yield exhibits superior predictive power after the currency swap market frictions are controlled.

Suggested Citation

  • Chen, Shiu-Sheng & Chou, Yu-Hsi, 2023. "Liquidity yield and exchange rate predictability," Journal of International Money and Finance, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:jimfin:v:137:y:2023:i:c:s0261560623001043
    DOI: 10.1016/j.jimonfin.2023.102903
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    More about this item

    Keywords

    Liquidity Yield; Meese–Rogoff Puzzle; Exchange Rate Forecasting;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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