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The Financial Development, Macroeconomic Stability, and Exchange Rate Volatility

Author

Listed:
  • Sang-Yong Joo

    (Sejong University)

  • Han-Gwang Choo

    (Sejong University)

  • Do-Sun Hong

    (Sejong University)

Abstract

We investigated the connection between the exchange rate volatility and the underlying fundamental volatility, and found that the two volatilities are correlated. This finding indicates that a flexible exchange rate need not be an unstable exchange rates and domestic macroeconomic stabilization policy aimed at reducing exchange rate volatility is still valid and important. For institutional factors reducing the fundamentals volatility associated with exchange rate fluctuations, we found the importance of two factors: the financial development and the reduction in exchange and capital controls. Various indices of them are found to affect macroeconomic stability. There seems to exist some underlying driving force between financial underdevelopment, macroeconomic instability, and exchange rate volatility all at the same time.

Suggested Citation

  • Sang-Yong Joo & Han-Gwang Choo & Do-Sun Hong, 2002. "The Financial Development, Macroeconomic Stability, and Exchange Rate Volatility," Korean Economic Review, Korean Economic Association, vol. 18, pages 69-87.
    • Handle: RePEc:kea:keappr:ker-200206-18-1-04
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    More about this item

    Keywords

    Financial development; macroeconomic stability; exchange rate volatility;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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