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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. 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.
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  12. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
  13. Sebastian Edwards, 1996. "The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes," NBER Working Papers 5756, National Bureau of Economic Research, Inc.
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  25. Maurice Obstfeld and Kenneth Rogoff., 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research (CIDER) Working Papers C99-107, University of California at Berkeley.
  26. Pritchett, Lant, 1998. "Patterns of economic growth : hills, plateaus, mountains, and plains," Policy Research Working Paper Series 1947, The World Bank.
  27. 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.
  28. Sebastian Edwards, 2001. "Exchange Rate Regimes, Capital Flows and Crisis Prevention," NBER Working Papers 8529, National Bureau of Economic Research, Inc.
  29. Michael Devereux & Charles Engel, 2000. "The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production," Working Papers 0022, University of Washington, Department of Economics.
  30. Sebastian Edwards, 1992. "Exchange Rates as Nominal Anchors," NBER Working Papers 4246, National Bureau of Economic Research, Inc.
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