Housing Cycles and Exchange Rates

Fisher College of Business Working Paper No. 2019-03-014

Charles A. Dice Center Working Paper No. 2019-14

59 Pages Posted: 9 May 2019 Last revised: 19 Dec 2019

See all articles by Sai Ma

Sai Ma

Board of Governors of the Federal Reserve

Shaojun Zhang

The Ohio State University

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

Ma, Sai and Zhang, Shaojun, Housing Cycles and Exchange Rates (December 13, 2019). Fisher College of Business Working Paper No. 2019-03-014. Available at SSRN: https://ssrn.com/abstract=3384816 or http://dx.doi.org/10.2139/ssrn.3384816

Sai Ma

Board of Governors of the Federal Reserve ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2870 (Phone)

HOME PAGE: http://saimaecon.com

Shaojun Zhang (Contact Author)

The Ohio State University

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/view/zhangshaojun

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