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Exchange Rate Volatility in Integrating Capital Markets

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  • Giancarlo Corsetti
  • Vittorio Grilli
  • Nouriel Roubini

Abstract

This paper investigates the relationship between international capital liberalization and exchange rate volatility. While the effects of a capital controls liberalization on the transaction volume in the foreign exchange market are theoretically unambiguous, the effects on the volatility of exchange rate can have either sign. On one hand, the liberalization leads to increasing economy-wide and investor-specific uncertainty. On the other hand, the augiented number of participants in the market should reduce exchange rate fluctuations. The uncertainty effects should be dominant in the short run, while the increase in the number of traders in the longer run should make the market thicker and tend to reduce volatility. It is shown that, for a sample of countries which have liberalized capital controls in the last 15 years, structural breaks in the process generating exchange rate volatility have occurred very close to the time when liberalization measures were implemented. The results also suggest an increase in volatility after the structural breakpoint.

Suggested Citation

  • Giancarlo Corsetti & Vittorio Grilli & Nouriel Roubini, 1990. "Exchange Rate Volatility in Integrating Capital Markets," NBER Working Papers 3570, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3570
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    File URL: http://www.nber.org/papers/w3570.pdf
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    References listed on IDEAS

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    1. Penati, Alessandro & Pennacchi, George, 1989. "Optimal portfolio choice and the collapse of a fixed-exchange rate regime," Journal of International Economics, Elsevier, vol. 27(1-2), pages 1-24, August.
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    Cited by:

    1. Daniele Checchi, 1992. "Capital controls and distribution of income: Empirical evidence for Great Britain Japan and Australia," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 128(3), pages 558-587, September.
    2. Sujit Bob Chakravorti, 1997. "Payments-related intraday credit differentials and the emergence of a vehicle currency," Financial Industry Studies Working Paper 97-3, Federal Reserve Bank of Dallas.
    3. Seyed Komail Tayebi & Leila Torki, 2012. "Effects of Financial Liberalization on Macroeconomic Volatilities: Applications to Economic Growth, Exchange Rate and Exchange Rate Pass-Through," Iranian Economic Review, Economics faculty of Tehran university, vol. 17(1), pages 71-84, winter.
    4. Alexandre Minda, 1993. "L'Espagne et l'intégration monétaire européenne," Revue d'Économie Financière, Programme National Persée, vol. 26(3), pages 171-200.

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