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On the macroeconomic causes of exchange rates volatility

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  • Claudio Morana

Abstract

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.

Suggested Citation

  • Claudio Morana, 2007. "On the macroeconomic causes of exchange rates volatility," ICER Working Papers 8-2007, ICER - International Centre for Economic Research.
    • Handle: RePEc:icr:wpicer:8-2007
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    More about this item

    Keywords

    exchange rates volatility; macroeconomic volatility; long memory; structural change; fractional cointegration; cobreaking; fractionally integrated factor vector autoregressive model; G-7 area;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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