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Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar

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  • Michael Bleaney

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  • Mo Tian

Abstract

We investigate monthly bilateral exchange rate volatility for a large sample of currency pairs over the period 1999–2006. Pegs (particularly to the US dollar) and managed floats tend to have lower volatility than independent floats. A deeper investigation shows that the peg effect operates almost entirely through currency networks (i.e. where two currencies are pegged to the same anchor currency), and the lower volatility of US dollar pegs reflects the size of the US dollar network. Managed floats show clear evidence of tracking the US dollar, further increasing the effective size of the US dollar network. Inflation undermines the currency-stabilizing effect of peg networks. Currencies in smaller peg networks have higher unweighted but not trade-weighted exchange rate volatility, which is consistent with anchors being chosen to minimize trade-weighted volatility. The size of the effective US dollar network revealed here is a plausible explanation of the rarity of basket pegs. Volatility also reflects a range of structural factors such as country size, level of development, population density, inflation differentials and business cycle asymmetry. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Michael Bleaney & Mo Tian, 2012. "Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar," Open Economies Review, Springer, vol. 23(5), pages 785-803, November.
  • Handle: RePEc:kap:openec:v:23:y:2012:i:5:p:785-803
    DOI: 10.1007/s11079-011-9229-x
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    References listed on IDEAS

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    Cited by:

    1. Michael F. Bleaney & Mo Tian & Lin Yin, 2017. "De Facto Exchange Rate Regime Classifications: An Evaluation," Open Economies Review, Springer, vol. 28(2), pages 369-382, April.

    More about this item

    Keywords

    Exchange rate volatility; Currency peg; Inflation; F3;

    JEL classification:

    • F3 - International Economics - - International Finance

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