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Research-based policy analysis and commentary from leading economists

Research-based policy analysis and commentary from leading economists

Strong economy, strong money

Ric Colacito, Steven R10 October 2019

The scientific literature suggests that exchange rates are disconnected from the state of the economy, and that macro variables that characterise the business cycle cannot explain asset prices while it is common to read in the press about linkages between the economic performance of a country and the evolution of its currency. This line stocks proof of a robust website link between money returns as well as the general energy for the company period within the cross-section of nations. A method that purchases currencies of strong economies and offers currencies of poor economies yields returns that are high within the cross part and in the long run.

A core issue in asset prices could be the need certainly to understand the partnership between fundamental macroeconomic conditions and asset market returns (Cochrane 2005, 2017). Nowhere is this more central, and yet regularly tough to establish, compared to the exchange that is foreignFX) market, by which currency returns and country-level fundamentals are very correlated the theory is that, yet the empirical relationship is normally discovered to be weak (Meese and Rogoff 1983, Rossi 2013). A present literary works in macro-finance has documented, nonetheless, that the behavior of exchange prices gets easier to explain once trade rates are examined in accordance with the other person within the cross area, instead of in isolation ( e.g.