What Explains Nominal Exchange Rate Volatility? Evidence from the Latin American Countries
This paper investigates the short-run and long-run impact of the determinants of nominal exchange rate volatility in three Latin American countries during the period 1979-2009. We estimate a multivariate GARCH model and include the covariances of those determinants, which have been ignored in the prior relevant literature. In combination with the role of financial openness and alternative exchange rate regimes, we find that nominal variability, namely variability in the money supply and inflation, explains exchange rate volatility. Output variations are found to be important as well, but only in floating countries. Financial openness seems to affect significantly the volatility of nominal exchange rate in all countries under examination. Finally, flexible exchange rate regimes tend to increase exchange rate volatility only in fixed and floating countries.
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