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Are exchange rates excessively volatile? And what does "excessively volatile" mean, anyway?

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  • Leonardo Bartolini
  • Gordon M. Bodnar

Abstract

Using data for the major currencies from 1973 to 1994, we apply recent tests of asset price volatility to reexamine whether exchange rates have been "excessively" volatile with respect to the predictions of the monetary model of the exchange rate and of standard extensions that allow for sticky prices, sluggish money adjustment, and time-varying risk premia. Consistent with previous evidence from regression-based tests, most of the models that we examine are rejected by our volatility-based tests. In general, however, we find that exchange rates have not been excessively volatile relative to movements of their determinants, with respect to the predictions of even the most restrictive version of the monetary model. Alternative measures of volatility, however, may disguise the cause of rejection as excessive exchange rate volatility.

Suggested Citation

  • Leonardo Bartolini & Gordon M. Bodnar, 1996. "Are exchange rates excessively volatile? And what does "excessively volatile" mean, anyway?," Research Paper 9601, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednrp:9601
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    Cited by:

    1. Jérôme Creel & Henri Sterdyniak, 1998. "Discussing Euro Volatility," Sciences Po publications 98-03, Sciences Po.
    2. Victoria Saporta & Kamhon Kan, 1997. "The effects of Stamp Duty on the Level and Volatility of Equity Prices," Bank of England working papers 71, Bank of England.
    3. Heinemann, Friedrich, 1998. "Die Theorie der optimalen Währungsräume und die politische Reformfähigkeit: Ein vernachlässigtes Kriterium," ZEW Discussion Papers 98-02, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Brandt, Michael W. & Santa-Clara, Pedro, 2002. "Simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets," Journal of Financial Economics, Elsevier, vol. 63(2), pages 161-210, February.
    5. Brousseau, Vincent & Scacciavillani, Fabio, 1999. "A global hazard index for the world foreign exchange markets," Working Paper Series 0001, European Central Bank.
    6. Pippenger, John, 2004. "The Modern Theory of the LOP and PPP: Some Implications," University of California at Santa Barbara, Economics Working Paper Series qt60z886n7, Department of Economics, UC Santa Barbara.
    7. Fayolle, J. & Micolet, P-E., 1998. "Cycles internationaux et européens: éléments pour une problématique appliquée," Documents de Travail de l'OFCE 1998-01, Observatoire Francais des Conjonctures Economiques (OFCE).
    8. Hossain, Monzur, 2009. "Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis," MPRA Paper 24868, University Library of Munich, Germany.
    9. M. Nowak & Ketil Hviding & Luca A Ricci, 2004. "Can Higher Reserves Help Reduce Exchange Rate Volatility?," IMF Working Papers 04/189, International Monetary Fund.
    10. George Furstenberg, 1998. "From Worldwide Capital Mobility to International Financial Integration: A Review Essay," Open Economies Review, Springer, vol. 9(1), pages 53-84, January.
    11. Pippenger, John, 2002. "A Better Measure of Relative Volatility," University of California at Santa Barbara, Economics Working Paper Series qt3tp6j494, Department of Economics, UC Santa Barbara.
    12. W A Razzak & Thomas Grennes, 1998. "The long-run nominal exchange rate: specification and estimation issues," Reserve Bank of New Zealand Discussion Paper Series G98/5, Reserve Bank of New Zealand.

    More about this item

    Keywords

    Foreign exchange rates;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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