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Research-based policy commentary and analysis from leading economists

Research-based policy commentary and analysis 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 hours the evolution of its currency. This line stocks proof of a link that is robust money returns plus the general power of this company period within the cross-section of nations. A method that purchases currencies of strong economies and offers currencies of poor economies creates high returns both within the cross area and as time passes.

A core problem in asset prices may be the should comprehend the partnership between fundamental conditions that are macroeconomic asset market returns (Cochrane 2005, 2017). Nowhere is this more central, and yet regularly hard to establish, compared to the currency exchange (FX) market, for which currency returns and country-level fundamentals are extremely correlated the theory is that, yet the empirical relationship is normally discovered become weak (Meese and Rogoff 1983, Rossi 2013).