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Factors are obtained as principal components, extracted from vintage macro\u2010datasets that combine FRED\u2010MD and OECD databases. Using 14 currencies over 1990\u20132021, 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\u2010varying loadings improve the overall predictive ability of the model, especially during crises, and lead to better forecasts of sign changes in exchange rates.<\/jats:p>","DOI":"10.1002\/jae.2984","type":"journal-article","created":{"date-parts":[[2023,5,13]],"date-time":"2023-05-13T06:22:40Z","timestamp":1683958960000},"page":"857-877","update-policy":"https:\/\/doi.org\/10.1002\/crossmark_policy","source":"Crossref","is-referenced-by-count":9,"title":["Exchange rates and macroeconomic fundamentals: Evidence of instabilities from time\u2010varying factor loadings"],"prefix":"10.1002","volume":"38","author":[{"given":"Eric","family":"Hillebrand","sequence":"first","affiliation":[{"name":"Department of Economics and Business Economics Aarhus University  Aarhus Denmark"}],"role":[{"vocabulary":"crossref","role":"author"}]},{"given":"Jakob Guldb\u00e6k","family":"Mikkelsen","sequence":"additional","affiliation":[{"name":"Danmarks Nationalbank  Copenhagen Denmark"}],"role":[{"vocabulary":"crossref","role":"author"}]},{"given":"Lars","family":"Spreng","sequence":"additional","affiliation":[{"name":"Centre for Econometric Analysis and Faculty of Finance Bayes Business School (formerly Cass)  London UK"}],"role":[{"vocabulary":"crossref","role":"author"}]},{"given":"Giovanni","family":"Urga","sequence":"additional","affiliation":[{"name":"Centre for Econometric Analysis and Faculty of Finance Bayes Business School (formerly Cass)  London UK"}],"role":[{"vocabulary":"crossref","role":"author"}]}],"member":"311","published-online":{"date-parts":[[2023,5,12]]},"reference":[{"key":"e_1_2_10_2_1","doi-asserted-by":"publisher","DOI":"10.3982\/ECTA8968"},{"key":"e_1_2_10_3_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.spl.2010.08.005"},{"key":"e_1_2_10_4_1","doi-asserted-by":"publisher","DOI":"10.1257\/0002828041301849"},{"key":"e_1_2_10_5_1","doi-asserted-by":"crossref","unstructured":"Bacchetta P. &vanWincoop E.(2009).On the unstable relationship between exchange rates and macroeconomic fundamentals. 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