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Structural Breaks in Volatility: Evidence for the OECD Real Exchange Rates

This paper analyses whether volatility changes in the bilateral and effective real exchange rates of the OECD industrial countries are associated with a specific nominal exchange rate regime. To that end, we examine the real exchange rate behaviour during the 1960-2003 period, therefore covering both the Bretton Woods system of fixed exchange rates and adoption of generalised floating exchange rates from 1973. We make use of an econometric methodology based on the Hansen (1997)'s approximation to the p-values of the supreme, exponential and average statistics developed by Andrews (1993) and Andrews and Ploberger (1994). This methodology allows us to obtain a profile of p-values and to delimit periods of stability and instability in the variance of real exchange rates. Results suggest that there is evidence in favour of the non-neutrality of nominal exchange rate regime regarding real exchange rate volatility.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2005/01.

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Length: 23 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:cea:doctra:e2005_01
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  1. Christopher Kent & Rafic Naja, 1998. "Effective Real Exchange Rates and Irrelevant Nominal Exchange-rate Regimes," RBA Research Discussion Papers rdp9811, Reserve Bank of Australia.
  2. Maximo Camacho, 2004. "Vector smooth transition regression models for US GDP and the composite index of leading indicators," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(3), pages 173-196.
  3. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
  4. Richard N. Cooper, 1999. "Exchange Rate Choices," Harvard Institute of Economic Research Working Papers 1877, Harvard - Institute of Economic Research.
  5. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
  6. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  7. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  8. John H. Rogers, 1995. "Real shocks and real exchange rates in really long-term data," International Finance Discussion Papers 493, Board of Governors of the Federal Reserve System (U.S.).
  9. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  10. Hong Liang, 1998. "Real Exchange Rate Volatility; Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 98/147, International Monetary Fund.
  11. Grilli, Vittorio & Kaminsky, Graciela, 1991. "Nominal exchange rate regimes and the real exchange rate : Evidence from the United States and Great Britain, 1885-1986," Journal of Monetary Economics, Elsevier, vol. 27(2), pages 191-212, April.
  12. Richard N. Cooper, 1999. "Exchange rate choices," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 43(Jun), pages 99-136.
  13. Jorge Carrera & Guillermo Vuletin, 2003. "The Effects of Exchange Rate Regimes on Real Exchange Rate Volatility. A Dynamic Panel Data Approach," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] c67, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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