Exchange Rate Returns and External Adjustment: Evidence from Switzerland.

This paper studies the predictive power of external imbalances for exchange rate returns. We focus on Switzerland, a very open economy where exchange rate movements have a strong effect on external imbalances through valuation effects and trade flows. Using a simple modification of the Gourinchas and Rey (J Polit Econ 115(4):665-703, ) approach to make their approximation applicable to Switzerland, we find that measures of deviations from trends in Swiss net foreign assets and net exports help to forecast Swiss franc nominal effective exchange rate movements, both in and out of sample. [ABSTRACT FROM AUTHOR]