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A consumption-based approach to exchange rate predictability

Author

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  • Ojeda-Joya, Jair
Abstract
We study whether the implications of an international consumption-based asset-pricing model are useful to provide out-sample predictability evidence for the real exchange rate. This model implies a predictability equation that results from the presence of both internal and external consumption habits in the utility function. In this equation, domestic, U.S. and world consumption growth are predictors of the real exchange rate. Our empirical exercises confirm this connection by providing evidence of short-term predictability on the bilateral rates of 15 out of 17 countries vis-à-vis the U.S. over the post Bretton-Woods float. A non-linear GMM estimation of some parameters of the model also brings about evidence of the presence of consumption habits in the utility function.

Suggested Citation

  • Ojeda-Joya, Jair, 2019. "A consumption-based approach to exchange rate predictability," MPRA Paper 94231, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:94231
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    References listed on IDEAS

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    Cited by:

    1. Jair N. Ojeda-Joya, 2014. "A Consumption-Based Approach to Exchange Rate Predictability," Borradores de Economia 857, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    exchange rates; out-of-sample; predictability; asset pricing; habits;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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