Exchange rates and macroeconomic fundamentals: Evidence of instabilities from time‐varying factor loadings
汇率与宏观基本面:来自时变因子载荷的不稳定性证据AI 解读 ↓
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汇率与宏观基本面:来自时变因子载荷的不稳定性证据AI 解读 ↓
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Summary We examine the relationship between exchange rates and macroeconomic fundamentals using a two‐step maximum likelihood estimator through which we compute time‐varying factor loadings. Factors are obtained as principal components, extracted from vintage macro‐datasets that combine FRED‐MD and OECD databases. Using 14 currencies over 1990–2021, we show that the loadings on the factors vary considerably over time and increase the percentage of explained variation in exchange rates by an order of magnitude. Time‐varying loadings improve the overall predictive ability of the model, especially during crises, and lead to better forecasts of sign changes in exchange rates.