IDEAS home Printed from https://ideas.repec.org/a/bla/rdevec/v19y2015i2p297-308.html
   My bibliography  Save this article

Are Flexible Exchange Rate Regimes more Volatile? Panel GARCH Evidence for the G7 and Latin America

Author

Listed:
  • Rodolfo Cermeño
  • María Eugenia Sanin

Abstract

This paper investigates empirically the relationship between exchange rate (ER) regimes and volatility of real exchange rate depreciation (RERD), comparing the G7 and 17 Latin American (LA17) countries, during 1970–2010. We estimate a panel autoregressive model with generalized autoregressive conditional heteroskedasticity (GARCH) errors and regime-specific effects on both the conditional mean and conditional variance. For the G7, we find that, relative to the fixed ER regime, only the freely floating regime shows higher RERD volatility; under the managed floating regime the RERD is equally volatile and under the crawling peg it is actually less volatile. Instead, in the case of the LA17, more flexible ER regimes are associated with more volatile RERD rates, with higher volatility under the managed floating regime than under the crawling peg and with extremely high volatility under the “freely falling” ER regime.

Suggested Citation

  • Rodolfo Cermeño & María Eugenia Sanin, 2015. "Are Flexible Exchange Rate Regimes more Volatile? Panel GARCH Evidence for the G7 and Latin America," Review of Development Economics, Wiley Blackwell, vol. 19(2), pages 297-308, May.
  • Handle: RePEc:bla:rdevec:v:19:y:2015:i:2:p:297-308
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/rode.12143
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
    2. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    3. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 441-479, December.
    4. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109.
    5. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
    7. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    8. Monacelli, Tommaso, 2004. "Into the Mussa puzzle: monetary policy regimes and the real exchange rate in a small open economy," Journal of International Economics, Elsevier, vol. 62(1), pages 191-217, January.
    9. Grier, Kevin & Hernandez-Trillo, Fausto, 2007. "The real exchange rate process and its real effects: The cases of Mexico and the USA," Journal of Applied Economics, Universidad del CEMA, vol. 0(Number 1), pages 1-25, May.
    10. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
    11. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    12. Agbeyegbe, Terence D. & Osakwe, Patrick N., 2005. "Real exchange rate volatility and the choice of regimes in emerging markets," Journal of Asian Economics, Elsevier, vol. 15(6), pages 1005-1022, January.
    13. Lothian, James R & McCarthy, Cornelia H, 2002. "Real Exchange Rate Behaviour Under Fixed and Floating Exchange Rate Regimes," Manchester School, University of Manchester, vol. 70(2), pages 229-245, March.
    14. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-698, August.
    15. Flood, Robert P. & Marion, Nancy P., 2000. "Self-fulfilling risk predictions:: an application to speculative attacks," Journal of International Economics, Elsevier, vol. 50(1), pages 245-268, February.
    16. Luca Dedola & Sylvain Leduc, 1999. "On exchange rate regimes, exchange rate fluctuations, and fundamentals," Working Papers 99-16, Federal Reserve Bank of Philadelphia.
    17. Tarlok Singh, 2002. "On the GARCH estimates of exchange rate volatility in India," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 391-395.
    18. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
    19. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, April.
    20. Kevin B. Grier & Aaron D. Smallwood, 2007. "Uncertainty and Export Performance: Evidence from 18 Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 965-979, June.
    21. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    22. Hong Liang, 1998. "Real Exchange Rate Volatility; Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 98/147, International Monetary Fund.
    23. Rudiger Dornbusch, 1980. "Exchange Rate Economics: Where Do We Stand?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 143-206.
    24. Jorge Carrera & Guillermo Vuletin, 2013. "The Effects Of Alternative Exchange Rate Regimes On Real Exchange Rate Volatility: Evidence Based On A New Dataset," Contemporary Economic Policy, Western Economic Association International, vol. 31(1), pages 212-234, January.
    25. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    26. Ali M. Kutan & Selahattin Dibooglu, 1998. "Sources of real and nominal exchange rate fluctuations in transition economies," Working Papers 1998-022, Federal Reserve Bank of St. Louis.
    27. 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, vol. 27(2), pages 191-212, April.
    28. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-890, October.
    29. Bleaney, Michael, 1992. "Comparisons of Real Exchange Rate Volatility across Exchange Rate Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(4), pages 557-565, November.
    30. Chernyshoff, Natalia & Jacks, David S. & Taylor, Alan M., 2009. "Stuck on gold: Real exchange rate volatility and the rise and fall of the gold standard, 1875-1939," Journal of International Economics, Elsevier, vol. 77(2), pages 195-205, April.
    31. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    32. repec:hrv:faseco:34721963 is not listed on IDEAS
    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


    Cited by:

    1. repec:spr:empeco:v:54:y:2018:i:2:d:10.1007_s00181-016-1212-3 is not listed on IDEAS

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:rdevec:v:19:y:2015:i:2:p:297-308. 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: (Wiley Content Delivery) or (Christopher F. Baum). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1363-6669 .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.