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Exchange Rate Volatility and Output Volatility: A Theoretical Approach

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  • Maria Grydaki
  • Stilianos Fountas

Abstract

This paper makes an attempt to determine the factors influencing exchange rate and exchange rate uncertainty, as well as output and output variability. In the context of a small open economy under flexible exchange rates regime it is found that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output, and trade balance. Further, the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. Finally, it is shown that the effect of the determinants either of exchange rate volatility or output volatility is very sensitive to the parameter values. Copyright � 2009 The Authors. Journal compilation � 2009 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 17 (2009)
Issue (Month): 3 (08)
Pages: 552-569

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Handle: RePEc:bla:reviec:v:17:y:2009:i:3:p:552-569

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  14. Karras, Georgios, 2006. "Trade Openness, Economic Size, and Macroeconomic Volatility: Theory and Empirical Evidence," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 21, pages 254-272.
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Cited by:
  1. Maria Grydaki & Stilianos Fountas, 2010. "What Explains Output Volatility? Evidence from the G3," Discussion Paper Series 2010_09, Department of Economics, University of Macedonia, revised Jul 2010.
  2. Maria Grydaki & Stilianos Fountas, 2010. "What Explains Nominal Exchange Rate Volatility? Evidence from the Latin American Countries," Discussion Paper Series 2010_10, Department of Economics, University of Macedonia, revised Jul 2010.

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