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Trade Openness And Real Exchange Rate Volatility: Panel Data Evidence

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  • César Calderón

Abstract

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.

Suggested Citation

  • César Calderón, 2004. "Trade Openness And Real Exchange Rate Volatility: Panel Data Evidence," Working Papers Central Bank of Chile 294, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:294
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    2. Maria Grydaki & Stilianos Fountas, 2010. "What Explains Nominal Exchange Rate Volatility? Evidence from the Latin American Countries," Discussion Paper Series 2010_10, Department of Economics, University of Macedonia, revised Jul 2010.
    3. Amalia Morales-Zumaquero & Simón Sosvilla-Rivero, 2012. "Real exchange rate volatility, financial crises and nominal exchange regimes," Working Papers 12-05, Asociación Española de Economía y Finanzas Internacionales.
    4. Comunale, Mariarosaria, 2017. "Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in EU," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 350-370.
    5. P., Srinivasan & M., Kalaivani, 2012. "Exchange Rate Volatility and Export Growth in India: An Empirical Investigation," MPRA Paper 43828, University Library of Munich, Germany.
    6. Thomas Habanabakize & Lerato Mothib & Precious Mncayi, 2021. "The Nexus between Government Revenue and Macroeconomic Indicators in South Africa," Eurasian Journal of Business and Management, Eurasian Publications, vol. 9(4), pages 258-267.
    7. Ionel Bostan & Carmen Toderașcu (Sandu) & Bogdan-Narcis Firtescu, 2018. "Exchange Rate Effects on International Commercial Trade Competitiveness," JRFM, MDPI, vol. 11(2), pages 1-11, April.
    8. Olimov, Ulugbek & Sirajiddinov, Nishanbay, 2008. "The Effects of the Real Exchange Rate Volatility and Misalignments on Foreign Trade Flows in Uzbekistan," Economics Discussion Papers 2008-29, Kiel Institute for the World Economy (IfW Kiel).
    9. Ponomarev, Yuriy (Пономарев, Юрий) & Rey, Aleksey (Рей, Алексей) & Radchenko, Darya (Радченко, Дарья), 2018. "Investigation of the Relationship between the Intensity of International Trade and the Volatility of Paired Exchange Rates of the Russian Federation and its Trading Partners [Исследование Взаимосвя," Working Papers 061823, Russian Presidential Academy of National Economy and Public Administration.

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