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Exchange Rate Volatility and Intervention: Implications of the Theory of Optimum Currency Areas

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  • Bayoumi, Tamim
  • Eichengreen, Barry

Abstract

We show that the variables pointed to by the theory of optimum currency areas (OCAs) help to explain patterns of exchange rate variability and intervention across countries. But OCA considerations affect exchange market pressures and intervention in different ways. Exchange market pressures mainly reflect asymmetric shocks, while intervention largely reflects the variables that OCA theory suggests cause countries to value stable exchange rates (small size and the extent of trade links). Intervention and exchange market pressure also vary with the structure of the international monetary system.

Suggested Citation

  • Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange Rate Volatility and Intervention: Implications of the Theory of Optimum Currency Areas," CEPR Discussion Papers 1982, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1982
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    1. Glick, Reuven & Kretzmer, Peter & Wihlborg, Clas, 1995. "Real exchange rate effects of monetary disturbances under different degrees of exchange rate flexibility: An empirical analysis," Journal of International Economics, Elsevier, vol. 38(3-4), pages 249-273, May.
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    7. Honkapohja, Seppo & Pikkarainen, Pentti, 1992. "Country Characteristics and the Choice of the Exchange Rate Regime: Are Mini-skirts Followed by Maxis?," CEPR Discussion Papers 744, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    Exchange Rate Volatility; Intervention; Optimum Currency Areas;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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