Hossain, Monzur (2009): Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis.
Download (342kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis|
|Keywords:||Currency regime, Developmental stage, Real exchange rate volatility|
|Subjects:||F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions|
|Depositing User:||Monzur Hossain|
|Date Deposited:||11. Sep 2010 10:09|
|Last Modified:||15. Feb 2013 23:24|
Anderson, T. W. and L.A. Goodman (1957). “Statistical inference about Markov chains”. The Annals of Mathematical Statistics, Vol. 28, 89-110.
Bartolini, Leonardo and 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.
Carrera and Vuletin (2003): “The effect of exchange rate regimes on real exchange rate volatility- A dynamic panel data approach”, paper presented at the 31st Brazilian Economics meeting, No. c67.
Chen, Shiu-Sheng and Charles Engel, 2005. "Does 'Aggregation Bias' Explain The Ppp Puzzle?" Pacific Economic Review, Blackwell Publishing, vol. 10(1), pages 49-72, 02.
Choudhry, Taufiq (2005). “Exchange rate volatility and the United States exports: evidence from Canada and Japan”, The Journal of the Japanese and International Economies, 19(2005), 51-71.
Coakley, J. and A. –M. Fuertes (2000). “Short run dynamics of real exchange rates”. The Manchester School, 68, 461-75.
Devereux, M. (1997). “Real exchange rates and macroeconomics: evidence and theory”, Canadian Journal of Economics 30, 773–808.
Devereux, M. and Engel, Ch. (2002). “Exchange rate pass-through, exchange rate volatility and exchange rate disconnect”, NBER Working Paper 8858.
Dickey, D. A. and W. A. Fuller (1981). “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root”. Econometrica, Vol. 49, No. 4.
Eichengreen, Barry (1994). “International Monetary Arrangements for the 21st Century”, Brookings Institution, Washington DC.
Engel, C. and J.D. Hamilton (1991). “Long swings in the dollar: Are they in the data and do markets know it”? American Economic Review 80, 689-713.
Frankel, J. and A. Rose (1995). Empirical research on nominal exchange rates, in G. Grossman and K. Rogoff (Eds.) Handbook of International Economics, 3, North Holland.
Frait, J. and L. Komárek (2001): “Real exchange rate tends in transitional countries”, Warwick Economic Research Papers No. 596.
Froot, Kenneth A. and Kenneth Rogoff (1996). "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc
Geweke, J., Porter-Hudak, S. (1983): "The estimation and application. of long-memory time series models." Journal of Time Series Analysis 4, 221 – 237
Goodman, L.A. (1955). “On the statistical analysis of Markov chains (abstract)”, Annals of Mathematical Statistics, Vol. 26, p.771.
Gotur, P. (1985). “Effects of exchange rate volatility on trade”. IMF Staff Papers, 32, 475-512.
Grilli, V. and G. Kaminsky (1991). “Nominal exchange rate regimes and the real exchange rate: Evidence from the United States and Britain, 1885-1986”, Journal of Monetary Economics, No 27, pp. 191-212.
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.
Hausmann, Panizza and Rigobon (2006) “The long-run volatility puzzle of the real exchange rate”, Journal of International Money and Finance, Vol. 25, No.1.
Helpman, E. (1981). “An exploration into the theory of exchange rate regimes”. Journal of Political Economy, 89. Huang, Roger D. (1981). “The monetary approach to exchange rate in an efficient foreign exchange market: Tests based on volatility”. Journal of finance, Vol. 36, pp. 31-41.
Imbs, Jean, Haroon Mumtaz and Morten O. Ravn & Hélène Rey (2005). "Aggregation Bias" DOES Explain the PPP Puzzle," NBER Working Papers 11607, National Bureau of Economic Research, Inc
Kenen, P. and Rodrik, D. (1986). “Measuring and Analyzing the effects of short-term volatility in real exchange rates.”, Review of Econ. Statistics, 68, 311-315.
Kent, Christopher and Rafic Naja (1998) “Effective real exchange rates and irrelevant nominal exchange-rate regimes”, Research Discussion Paper 9811, Reserve Bank of Australia
Kilian, L. and M. P. Taylor (2002). “Why is it so difficult to beat the random walk forecast of exchange rates?” Discussion paper. Center for Economic Policy Research; forthcoming, Journal of International Economics.
Kumar, M.., Moorthy, U. and Perraudin, W. (2003). “Predicting emerging market currency crashes”. Journal of Empirical Finance, 10, 427-454.
Levy-Yeyati, Eduardo and Federico Sturzenegar (2002). Classifying exchange rate regimes: Deeds versus words. Universidad Torcuato Di Tella. Available via the internet at: www.utdt.edu/~fsturzen.
_______________________ (2005) “Classifying exchange rate regimes Deeds vs. Words”, European Economic Review, Vol. 49, pp. 1603-35.
Liang, Hong (1998) “Real exchange rate volatility: Does nominal exchange rate regime matter”? IMF Working Paper, WP/98/147.
Marshalll, G. and R.H. Jones (1995). “Multi-state Markov models and diabetic retinopathy”. Statistics in Medicine, 14, 1995.
Mussa, Michael (1986). “Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications”. Carnegie-Rochester Conference Series on Public Policy, Vol. 25, pp. 117-213.
Pippenger, M.K. and G. E. Goering (1993). “A Note on the Empirical Power of Unit Root Tests under Threshold Processes”, Oxford Bulletin Of Economics And Statistics, 1993
Samuel Karlin and Howard M. Taylor (1975). “A first course in stochastic processes”, 2nd ed.. Academic Press.
Sarno, L. and M. P. Taylor (2002). “Purchasing power parity and the real exchange rate”. IMF Staff Papers, 49, 65-105.
Sercu, P. and R. Uppal (2000). Exchange rate volatility, Trade, and Capital flows under alternative exchange rate regimes. Cambridge University Press.
Shiller, R. J. (1981). “Do stock prices move too much to be justified by subsequent changes in dividends”? American Economic Review, 71, 421-436.
Spilimbergo, A. and Vamvakidis, A. (2000). “Real effective exchange rate and the constant elasticity of substitution Assumption”. IMF Working Paper, WP/00/128.
Wadhani, Sushil B. (1987). “Are exchange rates excessively volatile”? Journal of International Economics, Vol. 22, pp. 339-48.
Vander Kraats, R. H. and L. D. Booth (1983). “Empirical tests of the monetary approach to exchange rate determination”. Journal of International Money and Finance, 2, 255-278.