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On the macroeconomic causes of exchange rate volatility

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  • Morana, Claudio

Abstract

What are the causes of exchange rate volatility? When the 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 study support the above intuitions, pointing to important linkages and trade-offs relating exchange rates and macroeconomic volatility, with causality being stronger from macroeconomic volatility to exchange rate volatility than the other way around. An out of sample forecasting exercise shows how conditioning on macroeconomic information does improve medium- to long-term volatility forecasting.

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  • Morana, Claudio, 2009. "On the macroeconomic causes of exchange rate volatility," International Journal of Forecasting, Elsevier, vol. 25(2), pages 328-350.
    • Handle: RePEc:eee:intfor:v:25:y:2009:i:2:p:328-350
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    More about this item

    Keywords

    Exchange rate volatility Macroeconomic volatility Long memory Structural change Fractional cointegration Cobreaking Fractionally integrated factor vector autoregressive model G-7 area;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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