Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis
This paper analyzes real effective exchange rate (REER) volatility of 18 countries for the post-Bretton Woods period (1973-2004) under the Markov chain model framework. The findings can be summarized as follows: (i) flexible regimes induce higher short-term volatility; (ii) neither currency regime nor developmental stage is found to induce long-term real volatility; and (iii) flexible regimes and lower level of development can help adjust to long-term real shocks. Further investigation suggests that less developed economies adjust to long-term real shocks by deviating from their de jure exchange rate regime. Moreover, estimated steady state probability suggests that REER exhibits more stability in the long run, and it takes around 20 months to converge to equilibrium. In other words, this finding provides an explanation to purchasing power parity (PPP) in relative terms.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hau, Harald, 2000.
"Real Exchange Rate Volatility and Economic Openness: Theory and Evidence,"
CEPR Discussion Papers
2356, C.E.P.R. Discussion Papers.
- Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 611-30, August.
- Choudhry, Taufiq, 2005. "Exchange rate volatility and the United States exports: evidence from Canada and Japan," Journal of the Japanese and International Economies, Elsevier, vol. 19(1), pages 51-71, March.
- Michael B. Devereux & Charles Engel, 2002.
"Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect,"
NBER Working Papers
8858, National Bureau of Economic Research, Inc.
- Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July.
- M.B. Devereux & Ch. Engel, 2003. "Exchange Rate Pass-Through, Exchange Rate Volatility, and ExchangeRate Disconnect," DNB Staff Reports (discontinued) 77, Netherlands Central Bank.
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
- Spilimbergo, Antonio & Vamvakidis, Athanasios, 2003.
"Real effective exchange rate and the constant elasticity of substitution assumption,"
Journal of International Economics,
Elsevier, vol. 60(2), pages 337-354, August.
- Antonio Spilimbergo & Athanasios Vamvakidis, 2000. "Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption," IMF Working Papers 00/128, International Monetary Fund.
- Huang, Roger D, 1981. "The Monetary Approach to Exchange Rate in an Efficient Foreign Exchange Market: Tests Based on Volatility," Journal of Finance, American Finance Association, vol. 36(1), pages 31-41, March.
- Leonardo Bartolini & Gordon M. Bodnar, 1996.
"Are Exchange Rates Excessively Volatile? And What Does "Excessively Volatile" Mean, Anyway?,"
IMF Staff Papers,
Palgrave Macmillan, vol. 43(1), pages 72-96, March.
- Leonardo Bartolini & Gordon M. Bodnar, 1996. "Are exchange rates excessively volatile? And what does "excessively volatile" mean, anyway?," Research Paper 9601, Federal Reserve Bank of New York.
- Gordon M. Bodnar & Leonardo Bartolini, 1995. "Are Exchange Rates Excessively Volatile? and What Does "Excessively Volatile" Mean, Anyway?," IMF Working Papers 95/85, International Monetary Fund.
- Robert J. Shiller, 1980.
"Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?,"
NBER Working Papers
0456, National Bureau of Economic Research, Inc.
- Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
- Michael B. Devereux, 1997. "Real Exchange Rates and Macroeconomics: Evidence and Theory," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 773-808, November.
- Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003.
"Predicting emerging market currency crashes,"
Journal of Empirical Finance,
Elsevier, vol. 10(4), pages 427-454, September.
- Vander Kraats, R.H. & Booth, L.D., 1983. "Empirical tests of the monetary approach to exchange-rate determination," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 255-278, December.
- Hong Liang, 1998. "Real Exchange Rate Volatility: Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 98/147, International Monetary Fund.
- Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
- Wadhwani, Sushil B., 1987. "Are exchange rates 'excessively' volatile?," Journal of International Economics, Elsevier, vol. 22(3-4), pages 339-348, May.
- Lucio Sarno & Mark P. Taylor, 2002.
"Purchasing Power Parity and the Real Exchange Rate,"
IMF Staff Papers,
Palgrave Macmillan, vol. 49(1), pages 5.
- Sarno, Lucio & Taylor, Mark P, 2001. "Purchasing Power Parity and the Real Exchange Rate," CEPR Discussion Papers 2913, C.E.P.R. Discussion Papers.
- Ricardo Hausmann & Ugo Panizza & Roberto Rigobon, 2004.
"The Long-Run Volatility Puzzle of the Real Exchange Rate,"
NBER Working Papers
10751, National Bureau of Economic Research, Inc.
- Hausmann, Ricardo & Panizza, Ugo & Rigobon, Roberto, 2006. "The long-run volatility puzzle of the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 93-124, February.
- Padma Gotur, 1985. "Effects of Exchange Rate Volatility on Trade: Some Further Evidence (Effets de l'instabilitÃ© des taux de change sur le commerce mondial: nouvelles constatations) (Efectos de la inestabilidad de los t," IMF Staff Papers, Palgrave Macmillan, vol. 32(3), pages 475-512, September.
- Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
- Shiu-Sheng Chen & Charles Engel, 2005.
"Does 'Aggregation Bias' Explain The Ppp Puzzle?,"
Pacific Economic Review,
Wiley Blackwell, vol. 10(1), pages 49-72, 02.
- Frait , Jan & Komárek, Luboš, 2001. "REAL Exchange rate trends in transitional countries," The Warwick Economics Research Paper Series (TWERPS) 596, University of Warwick, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:24868. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.