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Structural Breaks in Volatility: Evidence for the OECD Real Exchange Rates

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Abstract

This paper analyses whether volatility changes in the bilateral and effective real exchange rates of the OECD industrial countries are associated with a specific nominal exchange rate regime. To that end, we examine the real exchange rate behaviour during the 1960-2003 period, therefore covering both the Bretton Woods system of fixed exchange rates and adoption of generalised floating exchange rates from 1973. We make use of an econometric methodology based on the Hansen (1997)'s approximation to the p-values of the supreme, exponential and average statistics developed by Andrews (1993) and Andrews and Ploberger (1994). This methodology allows us to obtain a profile of p-values and to delimit periods of stability and instability in the variance of real exchange rates. Results suggest that there is evidence in favour of the non-neutrality of nominal exchange rate regime regarding real exchange rate volatility.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2005/01.

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Length: 23 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:cea:doctra:e2005_01

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Keywords: Exchange rate regimes; real exchange rate; volatility;

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  1. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 821-56, July.
  2. Hong Liang, 1998. "Real Exchange Rate Volatility," IMF Working Papers, International Monetary Fund 98/147, International Monetary Fund.
  3. Robert P. Flood & Andrew K. Rose, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," NBER Working Papers 4503, National Bureau of Economic Research, Inc.
  4. John H. Rogers, 1995. "Real shocks and real exchange rates in really long-term data," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 493, Board of Governors of the Federal Reserve System (U.S.).
  5. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 117-214, January.
  6. Richard N. Cooper, 1999. "Exchange Rate Choices," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1877, Harvard - Institute of Economic Research.
  7. Grilli, Vittorio & Kaminsky, Graciela, 1991. "Nominal exchange rate regimes and the real exchange rate : Evidence from the United States and Great Britain, 1885-1986," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(2), pages 191-212, April.
  8. Christopher Kent & Rafic Naja, 1998. "Effective Real Exchange Rates and Irrelevant Nominal Exchange-rate Regimes," RBA Research Discussion Papers, Reserve Bank of Australia rdp9811, Reserve Bank of Australia.
  9. Richard N. Cooper, 1999. "Exchange rate choices," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, vol. 43(Jun), pages 99-136.
  10. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1015, Cowles Foundation for Research in Economics, Yale University.
  11. Jorge Carrera & Guillermo Vuletin, 2003. "The Effects of Exchange Rate Regimes on Real Exchange Rate Volatility. A Dynamic Panel Data Approach," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Gr c67, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  12. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
  13. Maximo Camacho, 2004. "Vector smooth transition regression models for US GDP and the composite index of leading indicators," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(3), pages 173-196.
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Cited by:
  1. Ana Carolina Ortega Masagué, . "La situación laboral de los inmigrantes en España: Un análisis descriptivo," Working Papers 2005-08, FEDEA.
  2. Namkee Ahn & Juan Ramón García & José A. Herce, . "Demographic Uncertainty and Health Care Expenditure in Spain," Working Papers 2005-07, FEDEA.
  3. Simon Sosvilla-Rivero & Pedro N. Rodríguez, . "Linkages in international stock markets: Evidence from a classification procedure," Working Papers 2004-23, FEDEA.
  4. Corinne Mette, . "Wellbeing and dependency among European elderly: The role of social integration," Working Papers 2005-12, FEDEA.

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