A Cass academic has shown that economic theory can be a valuable tool in predicting exchange rate movements.
Ranked by online business education magazine Poets & Quantz as one of the Best 40 Business School Professors under 40, Lucio Sarno is Professor of Finance and Head of the Faculty of Finance at Cass Business School. An expert in exchange rates, a subject on which he writes prolifically, Professor Sarno is routinely called for advice by governments, international organisations (including the US Federal Reserve, the European Central Bank and International Monetary Fund) and financial companies around the world.
His writings and advice have influenced several matters of policy, including the operating procedures of central banks in the foreign exchange market, the design of exchange rate policies, the prediction of currency fluctuations and currency crises, the use of capital controls, the management of public debt and the assessment of currency risk.
Professor Sarno's groundbreaking research has overturned the view that economic theory is of little use in predicting exchange rate movements. He has documented how the evolution of currencies can be understood in terms of very simple economic intuitions, thereby helping governments and individuals to an improved understanding of changes in the purchasing power of their currencies and the measures needed to hedge against currency risk.
His recent research supports the proposition that if a country runs a persistent deficit then its currency will depreciate, thus improving its competitiveness in selling its good and services abroad and so ultimately bringing it back into surplus.