A Consumption Based Approach to Exchange Rate Predictability


  • Borradores de economía


  • This paper provides evidence of short-run predictability for the real exchange rate by performing out-of-sample tests of a forecasting equation which is derived from a consumption-based asset pricing model. In this model, the real exchange rate is predictable as a result of the implications of preferences with habit persistence on the pricing of international assets. The implied predictors are: domestic, US and world consumption growth. Empirical exercises show evidence of short-term predictability on the bilateral rates of 15 out of 17 countries vis-à-vis the US over the post Bretton-Woods float. A GMM estimation of the parameters of the model also finds evidence of the presence of habits in consumers’ preferences.

fecha de publicación

  • 2014-12

Líneas de investigación

  • Asset Pricing
  • Exchange Rates
  • Habits
  • Out-of-Sample
  • Predictability


  • 857