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Fundamentals And Exchange Rate Volatility

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  • Michael Bleaney
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    Abstract

    Fundamentals may determine the range of real exchange rate fluctuation, through signals of misalignment, even if they are not a major influence on the level within that range. This can explain the puzzle that more open economies experience lower real exchange rate volatility. Adjustment of domestic prices to nominal exchange rate movements can account for only a small proportion of this effect. Sustainability analysis focuses on the ratio of the current account to GDP (rather than to total trade flows) as a misalignment signal, which implies narrower bounds for real exchange rates in more open economies.

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    Paper provided by University of Nottingham, School of Economics in its series Discussion Papers with number 06/03.

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    Handle: RePEc:not:notecp:06/03

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    Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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    1. Bleaney, Michael & Mizen, Paul, 1996. "Nonlinearities in Exchange-Rate Dynamics: Evidence from Five Currencies, 1973-94," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 72(216), pages 36-45, March.
    2. Olivier Jeanne & Andrew K. Rose, 1999. "Noise Trading and Exchange Rate Regimes," NBER Working Papers 7104, National Bureau of Economic Research, Inc.
    3. 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.
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    5. Yin-Wong Cheung & Menzie D. Chinn & Antonio Garcia Pascual, 2002. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," NBER Working Papers 9393, National Bureau of Economic Research, Inc.
    6. Ricardo Hausmann & Ugo Panizza & Roberto Rigobon, 2004. "The Long-Run Volatility Puzzle of the Real Exchange Rate," NBER Working Papers 10751, National Bureau of Economic Research, Inc.
    7. Frankel, Jeffrey A & Froot, Kenneth A, 1986. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 0(0), pages 24-38, Supplemen.
    8. McCracken, Michael W & Sapp, Stephen G, 2005. "Evaluating the Predictability of Exchange Rates Using Long-Horizon Regressions: Mind Your p's and q's!," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(3), pages 473-94, June.
    9. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 862-79, August.
    10. Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 34(3), pages 611-30, August.
    11. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 3993, July.
    12. Charles Engel & Kenneth D. West, 2004. "Exchange Rates and Fundamentals," NBER Working Papers 10723, National Bureau of Economic Research, Inc.
    13. Sollis, Robert & Leybourne, Stephen & Newbold, Paul, 2002. "Tests for Symmetric and Asymmetric Nonlinear Mean Reversion in Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 34(3), pages 686-700, August.
    14. C. Fred Bergsten & John Williamson (ed.), 2004. "Dollar Adjustment: How Far? Against What?," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number sr17, July.
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