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Structural breaks in volatility: Evidence for the OECD and non-OECD real exchange rates

  • Morales-Zumaquero, Amalia
  • Sosvilla-Rivero, Simon

This paper attempts to determine whether or not nominal exchange rate regimes affect the volatility of bilateral and effective real exchange rates. To that end, we examine the real exchange rate behaviour for a set of OECD and non-OECD countries during the 1960-2006 period, therefore covering both the Bretton Woods system of fixed exchange rates and the adoption of generalised floating exchange rates from 1973. We make use of an econometric methodology based on the Hansen's (Hansen, B.E., 1997. Approximate asymptotic P values for structural-change tests. Journal of Business and Economic Statistics 15 (1), 60-67) approximation to the p-values of the supreme, exponential and average statistics developed by Andrews (Andrews, D., 1993. Test for parameter instability and structural change with unknown change point. Econometrica 61 (4), 821-856) and Andrews and Ploberger (Andrews, D., Ploberger, W., 1994. Optimal tests when a nuisance parameter is present only under the alternative. Econometrica 62 (6), 1383-1414). This methodology allows us to obtain a profile of p-values and to delimit periods of stability and instability in the variance of real exchange rates. Results suggest that there is clear evidence in favour of the non-neutrality of nominal exchange rate regime regarding real exchange rate volatility for developed countries, but not in the case of developing or emerging countries.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 1 (February)
Pages: 139-168

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:1:p:139-168
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  4. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  5. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  6. Christopher Kent & Rafic Naja, 1998. "Effective Real Exchange Rates and Irrelevant Nominal Exchange-rate Regimes," RBA Research Discussion Papers rdp9811, Reserve Bank of Australia.
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  13. Hansen, Bruce E, 1997. "Approximate Asymptotic P Values for Structural-Change Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 60-67, January.
  14. Ilan Goldfajn & Rodrigo O. Valdes, 1996. "The Aftermath of Appreciations," NBER Working Papers 5650, National Bureau of Economic Research, Inc.
  15. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  16. Maximo Camacho, 2004. "Vector smooth transition regression models for US GDP and the composite index of leading indicators," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(3), pages 173-196.
  17. Richard N. Cooper, 1999. "Exchange rate choices," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 43(Jun), pages 99-136.
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