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Exchange Rate Volatility and U.S. Monetary Policy: An ARCH Application

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  • Lastrapes, William D

Abstract

This paper examines the effect of shifts in U.S. monetary policy regimes on the stochastic process that generates foreign exchange rates. To account for the observed behavior of the data record, the author models nominal, dollar exchange rates as univariate autoregressive conditional heteroskedastic processes. He then tests the stability of this process across U.S. monetary policy regimes. For four of the currencies in the sample, accounting for regime shifts improves the fit of the model. Regime shifts also appear to diminish the degree of persistence of variance, making it less likely that exchange rates are integrated-in-variance. Copyright 1989 by Ohio State University Press.

Suggested Citation

  • Lastrapes, William D, 1989. "Exchange Rate Volatility and U.S. Monetary Policy: An ARCH Application," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 66-77, February.
  • Handle: RePEc:mcb:jmoncb:v:21:y:1989:i:1:p:66-77
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    References listed on IDEAS

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    1. Alesina, Alberto & Sachs, Jeffrey, 1988. "Political Parties and the Business Cycle in the United States, 1948-1984," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 63-82, February.
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    8. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-630, October.
    9. Helpman, Elhanan & Sadka, Efraim, 1979. "Optimal Financing of the Government's Budget: Taxes, Bonds, or Money?," American Economic Review, American Economic Association, vol. 69(1), pages 152-160, March.
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    11. Drazen, Allan, 1979. "The optimal rate of inflation revisited," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 231-248, April.
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