Are Exchange Rates Excessively Volatile? and What Does "Excessively Volatile" Mean, Anyway?

August 1, 1995

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Format: Chicago

Gordon M. Bodnar, and Leonardo Bartolini. Are Exchange Rates Excessively Volatile? and What Does "Excessively Volatile" Mean, Anyway?, (USA: International Monetary Fund, 1995) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Using data for the major currencies from 1973 to 1994, we apply recent tests of asset price volatility to re-examine 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. This a Working Paper and the author(s) would welcome any comments on the present text. Citations should refer to a Working Paper of the International Monetary Fund, mentioning the author(s), and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.

Subject: Exchange rate modelling, Exchange rates, Foreign exchange, Income inequality, Market exchange rates, National accounts, Revenue administration, Small taxpayer office

Keywords: Benchmark exchange rate, Exchange rate bubble, Exchange rate dynamics, Exchange rate fluctuation, Exchange rate literature, Exchange rate modelling, Exchange rate surprise, Exchange rate volatility, Exchange rates, Income inequality, Market exchange rates, Small taxpayer office, Sticky-price exchange rate, Volatility in a way, Volatility over the post-Bretton Woods, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1995/085
Stock No:

WPIEA0851995
ISBN:

9781451850697
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 43, No. 1, March 1996.

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