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On the macroeconomic causes of exchange rates volatility

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  • Claudio Morana

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Abstract

What are the causes of exchange rate volatility? When 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 paper support the above intuitions pointing to important linkages and trade-offs relating exchange rate and macroeconomic volatility, with causality direction stronger from macroeconomic volatility to exchange rate volatility than the other way around. In particular, with a long-term perspective, Friedman (1953) conclusions on the macroeconomic sources of exchange rates instability and the impossibility of eliminating systemic volatility find full support in the empirical findings.

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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 8-2007.

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Length: 44 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:icr:wpicer:8-2007

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Keywords: exchange rates volatility; macroeconomic volatility; long memory; structural change; fractional cointegration; cobreaking; fractionally integrated factor vector autoregressive model; G-7 area;

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Cited by:
  1. 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.
  2. Cassola, Nuno & Morana, Claudio, 2012. "Euro money market spreads during the 2007-? financial crisis," Working Paper Series 1437, European Central Bank.
  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. 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.
  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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