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On the macroeconomic causes of exchange rates volatility

  • Claudio Morana


What are the causes of exchange rate volatility? When second moments implications of theories of exchange rates determination are considered, long-term fundamental linkages between macroeconomic and exchange rate volatility can be envisaged. Moreover, as the exchange rate is an important determinant of aggregate demand, bidirectional causality should be expected. The results of the paper support the above intuitions pointing to important linkages and trade-offs relating exchange rate and macroeconomic volatility, with causality direction stronger from macroeconomic volatility to exchange rate volatility than the other way around. In particular, with a long-term perspective, Friedman (1953) conclusions on the macroeconomic sources of exchange rates instability and the impossibility of eliminating systemic volatility find full support in the empirical findings.

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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 8-2007.

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Length: 44 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:icr:wpicer:8-2007
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