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IMF Support and Inter-Regime Exchange Rate Volatility

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  • Ivo Arnold
  • Ronald MacDonald
  • Casper Vries

Abstract

A widely held notion is that freely floating exchange rates are excessively volatile when moving from fixed to floating exchange rates. We re-examine the data and conclude that the disparity between the fundamentals and exchange rate volatility is more apparent than real, especially when the Deutsche Mark, rather than the dollar, is chosen as the numeraire currency. We argue and demonstrate that in inter-regime comparisons one has to account for certain ‘missing variables’ which compensate for the fundamental variables’ volatility under fixed exchange rates. We show that IMF credit support is a crucial compensating variable.
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  • Ivo Arnold & Ronald MacDonald & Casper Vries, 2012. "IMF Support and Inter-Regime Exchange Rate Volatility," Open Economies Review, Springer, vol. 23(1), pages 193-211, February.
    • Handle: RePEc:kap:openec:v:23:y:2012:i:1:p:193-211
    DOI: 10.1007/s11079-011-9231-3
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    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
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    10. Richard C. Marston, 1993. "Interest Differentials under Bretton Woods and the Post-Bretton Woods Float: The Effects of Capital Controls and Exchange Risk," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 515-546, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Michele Fratianni, 2012. "The Future International Monetary System: Dominant Currencies or Supranational Money? An Introduction," Open Economies Review, Springer, vol. 23(1), pages 1-12, February.

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    More about this item

    Keywords

    Exchange rates; Exchange rate regimes; Excess volatility; IMF credit; F31;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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