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Are Exchange Rates Excessively Volatile? And What Does "Excessively Volatile" Mean, Anyway?

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Author Info

  • Leonardo Bartolini

    (International Monetary Fund)

  • Gordon M. Bodnar

    (International Monetary Fund)

Abstract

We apply recent asset price volatility tests to re-examine whether exchange rates have been "excessively" volatile over the post-Bretton Woods period relative to the predictions of the monetary model of the exchange rate and of standard extensions with sticky prices, sluggish money adjustment, and risk premiums. Our tests reject most of the models that we examine. In general, however, we find that exchange rates have not been excessively volatile, relative to the predictions of even the most restrictive versions of the model. Alternative measures of volatility, however, may disguise the cause of rejection as excessive exchange rate volatility.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 43 (1996)
Issue (Month): 1 (March)
Pages: 72-96

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Handle: RePEc:pal:imfstp:v:43:y:1996:i:1:p:72-96

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References

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  1. N. Gregory Mankiw & David H. Romer & Matthew D. Shapiro, 1989. "Stock Market Forecastability and Volatility: A Statistical Appraisal," NBER Working Papers 3154, National Bureau of Economic Research, Inc.
  2. Ray C. Fair, 1986. "International Evidence on the Demand for Money," Cowles Foundation Discussion Papers 813, Cowles Foundation for Research in Economics, Yale University.
  3. Huang, Roger D, 1981. "The Monetary Approach to Exchange Rate in an Efficient Foreign Exchange Market: Tests Based on Volatility," Journal of Finance, American Finance Association, vol. 36(1), pages 31-41, March.
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  7. Jeffrey A. Frankel & Richard Meese, 1988. "Are Exchange Rates Excessively Variable?," NBER Working Papers 2249, National Bureau of Economic Research, Inc.
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  11. Tim Bollerslev & Robert J. Hodrick, 1992. "Financial Market Efficiency Tests," NBER Working Papers 4108, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Michael W. Brandt & Pedro Santa-Clara, 2001. "Simulated Likelihood Estimation of Diffusions with an Application to Exchange Rate Dynamics in Incomplete Markets," NBER Technical Working Papers 0274, National Bureau of Economic Research, Inc.
  2. Fayolle, J. & Micolet, P-E., 1998. "Cycles internationaux et européens: éléments pour une problématique appliquée," Documents de Travail de l'OFCE 1998-01, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Jerome Creel & Henri Sterdyniak, 1998. "Discussing Euro Volatility," Documents de Travail de l'OFCE 1998-03, Observatoire Francais des Conjonctures Economiques (OFCE).
  4. George Furstenberg, 1998. "From Worldwide Capital Mobility to International Financial Integration: A Review Essay," Open Economies Review, Springer, vol. 9(1), pages 53-84, January.
  5. Pippenger, John, 2002. "A Better Measure of Relative Volatility," University of California at Santa Barbara, Economics Working Paper Series qt3tp6j494, Department of Economics, UC Santa Barbara.
  6. M. Nowak & Ketil Hviding & Luca Antonio Ricci, 2004. "Can Higher Reserves Help Reduce Exchange Rate Volatility?," IMF Working Papers 04/189, International Monetary Fund.
  7. Heinemann, Friedrich, 1998. "Die Theorie der optimalen Währungsräume und die politische Reformfähigkeit: Ein vernachlässigtes Kriterium," ZEW Discussion Papers 98-02, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Victoria Saporta & Kamhon Kan, 1997. "The effects of Stamp Duty on the Level and Volatility of Equity Prices," Bank of England working papers 71, Bank of England.
  9. W A Razzak & Thomas Grennes, 1998. "The long-run nominal exchange rate: specification and estimation issues," Reserve Bank of New Zealand Discussion Paper Series G98/5, Reserve Bank of New Zealand.
  10. Hossain, Monzur, 2009. "Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis," MPRA Paper 24868, University Library of Munich, Germany.
  11. Brousseau, Vincent & Scacciavillani, Fabio, 1999. "A global hazard index for the world foreign exchange markets," Working Paper Series 0001, European Central Bank.

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