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Exchange Rate Volatility and Output Volatility: a Theoretical Approach

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This paper makes an attempt to determine the factors influencing exchange rate and exchange rate uncertainty, as well as, output and output variability. In the context of a small open economy under flexible exchange rates regime it is found that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output and trade balance. Further, the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. Finally, it is shown that the effect of the determinants either of exchange rate volatility or output volatility is very sensitive to the parameter values.

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Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2008_16.

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Date of creation: Dec 2008
Date of revision: Dec 2008
Handle: RePEc:mcd:mcddps:2008_16

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Web page: http://econlab.uom.gr/econdep/
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Keywords: Vexchange rate volatility; output volatility; open-economy models.;

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