On the macroeconomic causes of exchange rate volatility
AbstractWhat are the causes of exchange rate volatility? When the second moments implications of theories of exchange rates determination are considered, long-term fundamental linkages between macroeconomic and exchange rate volatility can be envisaged. Moreover, as the exchange rate is an important determinant of aggregate demand, bidirectional causality should be expected. The results of the study support the above intuitions, pointing to important linkages and trade-offs relating exchange rates and macroeconomic volatility, with causality being stronger from macroeconomic volatility to exchange rate volatility than the other way around. An out of sample forecasting exercise shows how conditioning on macroeconomic information does improve medium- to long-term volatility forecasting.
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Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Forecasting.
Volume (Year): 25 (2009)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/ijforecast
Exchange rate volatility Macroeconomic volatility Long memory Structural change Fractional cointegration Cobreaking Fractionally integrated factor vector autoregressive model G-7 area;
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