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Measuring the costs of exchange rate volatility

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  • Paul R. Bergin

Abstract

Many countries go to great lengths to manage their exchange rates. Probably the most prominent recent example is the European Monetary Union, where all the members abandoned their national currencies and adopted the euro. A number of developing countries maintain other kinds of regimes of managed exchange rates, even though they face potent market pressures to let their exchange rates float. One of the main motives for these arrangements stems from the extreme volatility of exchange rates. This volatility introduces an element of uncertainty into doing business across borders. Arguably, this uncertainty hinders international trade and, therefore, takes a toll in terms of economic welfare. ; Recent work in economics has turned to re-examining the question of whether having a stable exchange rate is worth these efforts. This research has used new tools to assess the economic welfare costs of exchange rate volatility. Specifically, the aim is to measure the costs of exchange rate volatility as a loss in the utility that people expect on average over time. This Economic Letter summarizes this literature and draws preliminary conclusions.

Suggested Citation

  • Paul R. Bergin, 2004. "Measuring the costs of exchange rate volatility," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue aug20.
  • Handle: RePEc:fip:fedfel:y:2004:i:aug20:n:2004-22
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    File URL: http://www.frbsf.org/publications/economics/letter/2004/el2004-22.html
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    File URL: http://www.frbsf.org/publications/economics/letter/2004/el2004-22.pdf
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    References listed on IDEAS

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    1. Eric van Wincoop & Philippe Bacchetta, 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?," American Economic Review, American Economic Association, vol. 90(5), pages 1093-1109, December.
    2. Paul R. Bergin & Ivan Tchakarov, 2003. "Does Exchange Rate Risk Matter for Welfare?," NBER Working Papers 9900, National Bureau of Economic Research, Inc.
    3. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 765-783.
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    Cited by:

    1. Jean-Yves Gnabo & Luiz de Mello & Diego Moccero, 2010. "Interdependencies between Monetary Policy and Foreign Exchange Interventions under Inflation Targeting: The Case of Brazil and the Czech Republic," International Finance, Wiley Blackwell, vol. 13(2), pages 195-221, August.
    2. Dengjun Zhang, 2015. "The trade effect of price risk: a system-wide approach," Empirical Economics, Springer, vol. 48(3), pages 1149-1167, May.

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