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Could the Exchange Rate Regime Reduce Macroeconomic Volatility?

This study intends to determine the relationship existing between the exchange rate regime and real volatility. After revising the theoretical and empirical results of previous research, it is proposed a new methodology that corrects deficiencies of previous empirical papers. The results show non-neutrality of the exchange rate regime. Particularly, it is found that the more rigid the regime is the grater real volatility will be. Even when it is performed an exchange rate regime classification that allows a comparison between consistent pegging and consistent floating, the former has a higher volatility. Countries with “fear of floating†behavior exhibit lower volatility than consistent pegs

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 309.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:309
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  1. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
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  8. Ricardo Hausmann & Michael Gavin, 1996. "Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America," IDB Publications (Working Papers) 5919, Inter-American Development Bank.
  9. Denizer Cevdet A. & Iyigun Murat F. & Owen Ann, 2002. "Finance and Macroeconomic Volatility," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-32, October.
  10. Michael B. Devereux & Charles Engel, 2001. "The Optimal Choice of Exchange Rate Regime: Price-Setting Rules and Internationalized Production," NBER Chapters, in: Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey, pages 163-194 National Bureau of Economic Research, Inc.
  11. Lane, Philip R., 1999. "The New Open Economy Macroeconomics: a Survey," CEPR Discussion Papers 2115, C.E.P.R. Discussion Papers.
  12. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  13. Baxter, M. & Stockman, A.C., 1988. "Business Cycles And The Exchange Rate System: Some International Evidence," RCER Working Papers 140, University of Rochester - Center for Economic Research (RCER).
  14. Susanto Basu & Alan M. Taylor, 1999. "Business Cycles in International Historical Perspective," NBER Working Papers 7090, National Bureau of Economic Research, Inc.
  15. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  16. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
  17. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
  18. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
  19. Sebastian Edwards, 2001. "Exchange Rate Regimes, Capital Flows and Crisis Prevention," NBER Working Papers 8529, National Bureau of Economic Research, Inc.
  20. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
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  22. Flood, Robert P, 1979. "Capital Mobility and the Choice of Exchange Rate System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 405-16, June.
  23. Pritchett, Lant, 1998. "Patterns of economic growth : hills, plateaus, mountains, and plains," Policy Research Working Paper Series 1947, The World Bank.
  24. Fabrice Collard & Harris Dellas, 2006. "Price Rigidity and the Selection of the Exchange Rate Regime," Open Economies Review, Springer, vol. 17(1), pages 5-26, January.
  25. Barry Eichengreen., 1993. "International Monetary Arrangements for the 21st Century," Center for International and Development Economics Research (CIDER) Working Papers C93-021, University of California at Berkeley.
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  27. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
  28. Jeffrey A. Frankel., 1994. "Monetary Regime Choices for a Semi-Open Country," Center for International and Development Economics Research (CIDER) Working Papers C94-036, University of California at Berkeley.
  29. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
  30. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
  31. Weber, Warren E, 1981. "Output Variability under Monetary Policy and Exchange Rate Rules," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 733-51, August.
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  33. Turnovsky, Stephen J, 1976. "The Relative Stability of Alternative Exchange Rate Systems in the Presence of Random Disturbances," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(1), pages 29-50, February.
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