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Are exchange rates excessively volatile? And what does \\"excessively volatile\\" mean, anyway?

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  • Leonardo Bartolini
  • Gordon M. Bodnar

Abstract

Using data for the major currencies from 1973 to 1994, we apply recent tests of asset price volatility to reexamine whether exchange rates have been \\"excessively\\" volatile with respect to the predictions of the monetary model of the exchange rate and of standard extensions that allow for sticky prices, sluggish money adjustment, and time-varying risk premia. Consistent with previous evidence from regression-based tests, most of the models that we examine are rejected by our volatility-based tests. In general, however, we find that exchange rates have not been excessively volatile relative to movements of their determinants, with respect to the predictions of even the most restrictive version of the monetary model. Alternative measures of volatility, however, may disguise the cause of rejection as excessive exchange rate volatility.

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  • 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.
    • Handle: RePEc:fip:fednrp:9601
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    Cited by:

    1. Jerome Creel & Henri Sterdyniak, 1998. "Discussing Euro Volatility," Documents de Travail de l'OFCE 1998-03, Observatoire Francais des Conjonctures Economiques (OFCE).
    2. Pippenger, John, 2002. "A Better Measure of Relative Volatility," University of California at Santa Barbara, Economics Working Paper Series qt3tp6j494, Department of Economics, UC Santa Barbara.

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