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Exchange Rate Volatility, Monetary Policy, and Capital Mobility: Empirical Evidence on the Holy Trinity

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  • Andrew K. Rose

Abstract

This paper uses a panel of data from twenty-two countries between 1967 and 1992 to explore the tradeoff between the 'Holy Trinity' of fixed exchange rates, independent monetary policy, and capital mobility. I use: flexible- and sticky-price monetary exchange rate models to parameterize monetary divergence; factor analysis to extract measures of capital mobility from a variety of different indicators; and conditional exchange rate volatility to measure the degree to which the exchange rate is fixed. Exchange rate volatility is loosely linked to both monetary divergence and the degree of capital mobility. Interestingly, exchange rate volatility is significantly correlated with the width of the explicitly declared exchange rate band, even after taking monetary divergence and capital mobility into account.

Suggested Citation

  • Andrew K. Rose, 1994. "Exchange Rate Volatility, Monetary Policy, and Capital Mobility: Empirical Evidence on the Holy Trinity," NBER Working Papers 4630, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4630
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    References listed on IDEAS

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    1. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, January.
    2. Alan C. Stockman, 1993. "International Transmission under Bretton Woods," NBER Chapters,in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 317-356 National Bureau of Economic Research, Inc.
    3. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    4. A Alesina & V Grilli & G Milesi-Feretti, 1993. "The Political Economy of Capital Controls," CEP Discussion Papers dp0169, Centre for Economic Performance, LSE.
    5. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferrett, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc.
    6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    7. repec:cdl:ucsbec:16-92 is not listed on IDEAS
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    Cited by:

    1. Frankel, J-A & Rose, A-K, 1996. "Economic Structure and the Decision to Adopt a Common Currency," Papers 611, Stockholm - International Economic Studies.
    2. Jeffrey A. Frankel & Andrew K. Rose, 1994. "A Survey of Empirical Research on Nominal Exchange Rates," NBER Working Papers 4865, National Bureau of Economic Research, Inc.
    3. Ansgar Belke & Leo Kaas, 2004. "Exchange Rate Movements and Employment Growth: An OCA Assessment of the CEE Economies," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(2), pages 247-280, June.
    4. Levy Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2010. "On the endogeneity of exchange rate regimes," European Economic Review, Elsevier, vol. 54(5), pages 659-677, July.
    5. Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading and Exchange Rate Regimes," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 537-569.
    6. Daniel Gros, 1996. "Germany’s stake in exchange rate stability," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 31(5), pages 236-240, September.
    7. Hjalmar Böhm & Michael Funke, 2001. "Does the Nominal Exchange Rate Regime Matter for Investment?," CESifo Working Paper Series 578, CESifo Group Munich.
    8. Ansgar Belke & Daniel Gros, 2001. "Real Impacts of Intra-European Exchange Rate Variability: A Case for EMU?," Open Economies Review, Springer, vol. 12(3), pages 231-264, July.
    9. Nissanke, Machiko, 2003. "Revenue Potential of the Currency Transaction Tax for Development Finance: A Critical Appraisal," WIDER Working Paper Series 081, World Institute for Development Economic Research (UNU-WIDER).
    10. Ansgar Belke & Ralph Setzer, 2003. "Exchange Rate Volatility and Employment Growth: Empirical Evidence from the CEE Economies," CESifo Working Paper Series 1056, CESifo Group Munich.
    11. Gan Wee & Soone Le Ying, 2000. "Exchange rate and interest rate differential: the case of the Malaysian Ringgit/US Dollar," Applied Economics Letters, Taylor & Francis Journals, vol. 7(2), pages 95-97.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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