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Monetary Policy Predicts Currency Movements

Author

Listed:
  • Bartram, Söhnke
  • Grinblatt, Mark
  • Xu, Yan

Abstract

The relative restrictiveness of a central bank’s supply of money predicts the raw and risk-adjusted returns of its currency—both next month and at least three years into the future. Archived data, known by currency traders at the time, estimates central bank restrictiveness as a scaling of the residual from out-of-sample panel regressions of M1 on macroeconomic variables tied to domestic and international transaction requirements. Carry’s ability to forecast currency returns is subsumed by the central bank restrictiveness signal, which also forecasts inflation.

Suggested Citation

  • Bartram, Söhnke & Grinblatt, Mark & Xu, Yan, 2025. "Monetary Policy Predicts Currency Movements," CEPR Discussion Papers 19881, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19881
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    File URL: https://cepr.org/publications/DP19881
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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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