Advanced Search
MyIDEAS: Login to save this paper or follow this series

Liberalized Markets Have More Stable Exchange Rates

Contents:

Author Info

  • Ales Bulir

Abstract

The paper looks at the hypothesis that financial market liberalization can create a basis for more stable exchange rates, as deviations of exchange rates from equilibrium levels bring forth stabilizing flows of liquidity. This "endogenous liquidity" hypothesis suggests that opening financial markets militates in favor of exchange rate flexibility by increasing the viability of a floating regime, as well as making it more difficult to maintain a peg. The paper examines this hypothesis in a sample of four transition economies and finds that exchange rates tend to return faster to their Hodrick-Prescott-based values where markets are liberalized. The results suggest that early and successful foreign exchange liberalization pays off in terms of depth of the market and, hence, faster adjustment of exchange rate to shocks. Moreover, it implies that central banks should not be overly concerned with short-run volatility of their national exchange rates, given the self-correcting tendencies.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=17148
Download Restriction: no

Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/35.

as in new window
Length: 32
Date of creation: 01 Feb 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/35

Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Email:
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords: Exchange rates; Markets; Transition economies; Economic models; exchange rate; foreign exchange; random walk; kurtosis; autocorrelation; standard errors; equation; foreign exchange market; statistics; exchange rate volatility; exchange rate determination; skewness; foreign exchange markets; exchange rate arrangements; significance level; exchange markets; euro exchange rates; exchange rate regimes; samples; forecasting; euro exchange rate; statistic; exchange rate developments; exchange rate data; daily exchange rate; stable exchange rates; exchange rate arrangement; time series; nominal exchange rate; empirical model; exchange rate dynamics; real exchange rate; outlier; nonlinearity; correlation; explanatory power; standard deviation; cointegration; normal distributions; sample mean; bilateral exchange rate; exchange rate flexibility; mean square; floating exchange rates; exchange rate shock; market exchange rates; currency units; history of exchange rate; logarithms; exchange rate shocks; exchange rate fluctuations; exchange rate movements; outliers; maximum likelihood estimation; dollar exchange rate; exchange rate regime; central tendency; daily exchange rates; exchange rate adjustment; exchange rate path; real exchange rate appreciation; equations; exchange rate appreciation; probability; correlations; flexible ? exchange rates; exchange rate movement; exchange rate risk; exchange rate variability;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Devereux, Michael B. & Lane, Philip R., 2003. "Understanding bilateral exchange rate volatility," Journal of International Economics, Elsevier, Elsevier, vol. 60(1), pages 109-132, May.
  2. István P. Székely & Ãdám Kóbor, 2004. "Foreign Exchange Market Volatility in Eu Accession Countries in the Run-Up to Euro Adoption," IMF Working Papers 04/16, International Monetary Fund.
  3. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, American Finance Association, vol. 42(3), pages 483-510, July.
  4. Michel Beine & Sébastien Laurent & Christelle Lecourt, 2003. "Official central bank interventions and exchange rate volatility: evidence from a regime-switching analysis," ULB Institutional Repository 2013/10437, ULB -- Universite Libre de Bruxelles.
  5. Helmut Stix, 2002. "Does Central Bank Intervention Influence the Probability of a Speculative Attack? Evidence from the EMS," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 80, Oesterreichische Nationalbank (Austrian Central Bank).
  6. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers, University of California at Berkeley RPF-288, University of California at Berkeley.
  7. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 552-576, June.
  8. Hamid Faruqee & Lee Redding, 1999. "Endogenous Liquidity Providers and Exchange Rate Dynamics," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 32(4), pages 976-994, August.
  9. Kobor, Adam & Szekely, Istvan P., 2004. "Foreign exchange market volatility in EU accession countries in the run-up to Euro adoption: weathering uncharted waters," Economic Systems, Elsevier, Elsevier, vol. 28(4), pages 337-352, December.
  10. Darvas, Zsolt & Szapary, Gyorgy, 2000. "Financial Contagion in Five Small Open Economies: Does the Exchange Rate Regime Really Matter?," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 3(1), pages 25-51, April.
  11. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  12. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 93-01, Federal Reserve Bank of San Francisco.
  13. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  14. Alexis Derviz, 2003. "Components of the Czech Koruna Risk Premium in a Multiple-Dealer FX Market," Working Papers, Czech National Bank, Research Department 2003/04, Czech National Bank, Research Department.
  15. Kim, Soyoung, 2003. "Monetary policy, foreign exchange intervention, and the exchange rate in a unifying framework," Journal of International Economics, Elsevier, Elsevier, vol. 60(2), pages 355-386, August.
  16. repec:cup:macdyn:v:1:y:1997:i:3:p:640-57 is not listed on IDEAS
  17. Siklos, P.L. & Granger, C.W.J., 1997. "Regime Sensitive Cointegration with an Application to Interest rate Parity," Working Papers, Wilfrid Laurier University, Department of Economics 97-5, Wilfrid Laurier University, Department of Economics.
  18. Lucio Sarno, 2003. "Nonlinear Exchange Rate Models," IMF Working Papers 03/111, International Monetary Fund.
  19. Bofinger, Peter & Wollmershäuser, Timo, 2001. "Managed floating: Understanding the new international monetary order," W.E.P. - Würzburg Economic Papers 30, University of Würzburg, Chair for Monetary Policy and International Economics.
  20. repec:fth:wilfau:97-5 is not listed on IDEAS
  21. Lucio Sarno, 2003. "Nonlinear Exchange Rate Models: A Selective Overview," Rivista di Politica Economica, SIPI Spa, SIPI Spa, vol. 93(4), pages 3-46, July-Augu.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Gilda Fernandez & Cem Karacadag & Rupa Duttagupta, 2004. "From Fixed to Float," IMF Working Papers 04/126, International Monetary Fund.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:04/35. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.