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On the macroeconomic causes of exchange rate volatility

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  • Morana, Claudio

Abstract

What 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 Info

Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 25 (2009)
Issue (Month): 2 ()
Pages: 328-350

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Handle: RePEc:eee:intfor:v:25:y:2009:i:2:p:328-350

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Web page: http://www.elsevier.com/locate/ijforecast

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Keywords: 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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Citations

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Cited by:
  1. Claudio Morana, 2013. "Factor Vector Autoregressive Estimation of Heteroskedastic Persistent and Non Persistent Processes Subject to Structural Breaks: New Insights on the US OIS SPreads Term Structure," Working Papers 233, University of Milano-Bicocca, Department of Economics, revised Feb 2013.
  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.
  3. Nuno Cassola & Claudio Morana, 2010. "The 2007-? financial crisis: a euro area money market perspective," ICER Working Papers - Applied Mathematics Series 35-2010, ICER - International Centre for Economic Research.
  4. Cassola, Nuno & Morana, Claudio, 2012. "Euro money market spreads during the 2007-? financial crisis," Working Paper Series 1437, European Central Bank.
  5. Claudio Morana, 2010. "Heteroskedastic Factor Vector Autoregressive Estimation of Persistent and Non Persistent Processes Subject to Structural Breaks," ICER Working Papers - Applied Mathematics Series 36-2010, ICER - International Centre for Economic Research.

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