Exchange Rate Regimes and the Volatility of Financial Prices: The Australian Case
AbstractMuch has been written about the choice of exchange rate regimes from a theoretical perspective. A conclusion of this literature is that, ceteris paribus, interest rates should exhibit less volatility (and exchange rates more volatility) under a floating than under a fixed exchange rate regime. Equivalently, interest rates should be relatively easier (and exchange rates relatively harder) to predict (in the statistical sense) under a floating exchange rate. Further, the unexpected volatility in interest rates due to external impulses should be reduced, and that in exchange rates increased, relative to a fixed exchange rate regime. This study analyses the question of interest rate and exchange rate volatility before and after the floating of the Australian dollar in December 1983. The paper adopts an atheoretical methodology of vector autoregressions (VARâs) to calculate the forecast-error variance for interest rates and exchange rates (at different horizons) and to decompose these forecast-error variances into those parts attributable to domestic and external sources. A VAR model is estimated for both the pre- and post-float periods, on daily data for the Australian trade-weighted index, the Australian 90 day bank accepted bill rate, the US trade-weighted index, the US 90 day prime bankersâ acceptances rate, the DM trade-weighted index, the West German 90 day interbank deposits rate, the Japanese trade-weighted index and the Japanese 90 day Gensaki rate. This is the minimum configuration that can capture both domestic and foreign sources of volatility in financial prices. The analysis supports the hypothesis that interest rates have become relatively less volatile (and the exchange rate relatively more volatile) with the move to a floating exchange rate regime. However, the evidence suggests that this has been due to a change in the nature of the relationship between the Autralian interest rate and exchange rate; rather than a shift in the incidence of external s
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoArticle provided by The Economic Society of Australia in its journal The Economic Record.
Volume (Year): 0 (1986)
Issue (Month): 0 (Supplement)
Contact details of provider:
Postal: Central Council Administration, L.P.O. Box 2161, Hawthorn VIC 3122
Phone: 61 3 9497 4140
Fax: 61 3 9497 4140
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0013-0249
More information through EDIRC
Other versions of this item:
- Robert G. Trevor & Stephen G. Donald, 1986. "Exchange Rate Regimes and the Volatility of Financial Prices: The Australian Case," RBA Research Discussion Papers rdp8608, Reserve Bank of Australia.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Michael D. Bordo & Christopher Meissner & Angela Redish, 2003. "How "Original Sin" was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions," NBER Working Papers 9841, National Bureau of Economic Research, Inc.
- O'Mara, L. Paul & Wallace, N.A. & Meshios, Helen, 1987. "The Current Account, Monetary Policy, Market Sentiment And The Real Exchange Rate: Some Implications For The Farm Sector," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 31(03), December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.