Housing Cycles and Exchange Rates
Charles A. Dice Center Working Paper No. 2019-14
59 Pages Posted: 9 May 2019 Last revised: 19 Dec 2019
Date Written: December 13, 2019
Exchange rates are stubbornly disconnected from macroeconomic fundamentals. This paper documents that the ratio of residential-to-nonresidential investment is a strong in-sample and out-of-sample for the dollar up to twelve quarters. The measure captures investment in the nontradable relative to tradable sector and drives dollar variations through relative price adjustments. The required dollar premium further varies as the expected fraction of nontradable output fluctuates, suggesting limited international risk sharing. Alternative explanations, including aggregate risk, capital flows, and time-varying market segmentation, find less empirical support. The predictability is robust to a host of additional checks and holds for other G10 currencies.
Keywords: housing, exchange rate, predictability
JEL Classification: F31, F37, G150, G17
Suggested Citation: Suggested Citation