Affiliation:
1. Division of International Finance, Federal Reserve Board of Governors, Washington, District of Columbia 20551;
2. Department of Finance, Fisher College of Business, The Ohio State University, Columbus, Ohio 43212
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 12 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 time-varying housing preference, productivity, and volatility. In the model, the U.S. housing investment share is higher during periods with higher growth and lower uncertainty, corresponding to lower future nontradable prices, dollar index, and excess returns. We find strong empirical support for the channel. Alternative explanations, including the business and financial cycle, find less empirical support. This paper was accepted by David Sraer, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4932 .
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Subject
Management Science and Operations Research,Strategy and Management