Trade Openness And Real Exchange Rate Volatility: Panel Data Evidence
A recent strand of the literature, the so-called “New Open Economy Macroeconomics”, argues that nonmonetary factors have gained importance in explaining exchange rate volatility. In this context, it has been suggested the inclusion of shocks to productivity, terms of trade, and government spending, among others. The goal of the present paper is to explain the real exchange rate volatility by positing a structural relationship between volatility and its determinants. To perform our task we collected information on exchange rates, output, terms of trade, government spending, monetary aggregates, exchange rate regimes, trade and financial openness for a sample of industrial and developing countries for the 1974-2003 period. We will use GMM-IV methods for panel data to test the following hypotheses: (a) real exchange rate (RER) fluctuations are less volatile in more open countries, and (b) trade openness helps attenuate the impact of highly volatile shocks to fundamentals on the volatility of RER fluctuations.
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- Romain Wacziarg & Karen Horn Welch, 2003.
"Trade Liberalization and Growth: New Evidence,"
NBER Working Papers
10152, National Bureau of Economic Research, Inc.
- Alan C. Stockman, 1988.
"Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory,"
NBER Working Papers
2565, National Bureau of Economic Research, Inc.
- Stockman, Alan C., 1988. "Real exchange-rate variability under pegged and floating nominal exchange-rate systems: An equilibrium theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 259-294, January.
- Stockman, A.C., 1988. "Real Exchange Rate Variability Under Pegged And Floating Nominal Exchange Rate Systems: An Equilibrium Theory," RCER Working Papers 128, University of Rochester - Center for Economic Research (RCER).
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