Housing Cycles and Exchange Rates

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

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

48 Pages Posted: 9 May 2019 Last revised: 30 Nov 2022

See all articles by Sai Ma

Sai Ma

Board of Governors of the Federal Reserve System

Shaojun Zhang

The Ohio State University

Date Written: December 13, 2019

Abstract

This paper documents that the ratio of residential-to-nonresidential investment is a strong in-sample and out-of-sample predictor for the dollar up to twelve quarters. The predictability is robust to a battery of additional checks and holds for other G10 currencies. We explain the predictability in an analytical model with stochastic volatility and endogenous investment. In the model, the U.S. housing investment share is higher during periods of a strong dollar and low domestic uncertainty, indicating lower future dollar changes and dollar premium. We find strong empirical support for the channel. Alternative explanations, including the business and financial cycle, find less empirical support.

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, Charles A. Dice Center Working Paper No. 2019-14, 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 System ( email )

20th Street and Constitution Avenue NW
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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