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Remoteness and Real Exchange Rate Volatility

Author

Listed:
  • Claudio Bravo-Ortega

    (International Monetary Fund)

  • Julian di Giovanni

    (International Monetary Fund)

Abstract

This paper examines the impact of trade costs on real exchange rate volatility. The relationship is examined by constructing a two-country Ricardian model of trade, based on the work of Dornbusch, Fischer, and Samuelson (1977), which shows that higher trade costs result in a larger nontradables sector, in turn leading to higher real exchange rate volatility. We then construct a remoteness index to proxy for trade costs, and provide empirical evidence supporting the channel. Copyright 2006, International Monetary Fund

Suggested Citation

  • Claudio Bravo-Ortega & Julian di Giovanni, 2006. "Remoteness and Real Exchange Rate Volatility," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-6.
  • Handle: RePEc:pal:imfstp:v::y:2006:i:si:p:6
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    References listed on IDEAS

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    1. Rodrik, Dani, 1999. "Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses," Journal of Economic Growth, Springer, vol. 4(4), pages 385-412, December.
    2. Shang-Jin Wei, 2000. "Natural openness and good government," Policy Research Working Paper Series 2411, The World Bank.
    3. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," NBER Working Papers 6849, National Bureau of Economic Research, Inc.
    4. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-751, August.
    5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    6. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-839, December.
    7. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    8. Claudio Bravo-Ortega AND Julian di Giovanni, 2004. "Trade Costs and Real Exchange Rate Volatility," Econometric Society 2004 Latin American Meetings 227, Econometric Society.
    9. Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 611-630, August.
    10. Kanda Naknoi, 2005. "Real Exchange Rate Fluctuations and Endogenous Tradability," 2005 Meeting Papers 857, Society for Economic Dynamics.
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    Citations

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    Cited by:

    1. 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.
    2. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Journal of Monetary Economics, Elsevier, pages 494-513.
    3. Claudio Bravo-Ortega, 2009. "Do Multilateral Trade Linkages Explain Bilateral Real Exchange Rate Volatility?," Working Papers wp304, University of Chile, Department of Economics.
    4. Michael Bleaney & Manuela Francisco, 2010. "What Makes Currencies Volatile? An Empirical Investigation," Open Economies Review, Springer, pages 731-750.
    5. Eichler, Stefan & Littke, Helge C. N., 2017. "Central bank transparency and the volatility of exchange rates," IWH Discussion Papers 22/2017, Halle Institute for Economic Research (IWH).
    6. 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.
    7. Chaiyasit Anuchitworawong, 2011. "Comment on "Identifying the Relationship Between Trade and Exchange Rate Volatility"," NBER Chapters,in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 110-114 National Bureau of Economic Research, Inc.
    8. Serhan Cevik & Richard Harris & Fatih Yilmaz, 2015. "Soft Power and Exchange Rate Volatility," IMF Working Papers 15/63, International Monetary Fund.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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