Real exchange rate volatility, financial crises and nominal exchange regimes

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Instituto Complutense de Estudios Internacionales (ICEI)
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This paper examines the sources of real exchange rate (RER) volatility in eighty countries around the world, during the period 1970 to 2011. Our main goal is to explore the role of nominal exchange rate regimes and financial crises in explaining the RER volatility. To that end, we employ two complementary procedures that consist in detecting structural breaks in the RER series and decomposing volatility into its permanent and transitory components. The results confirm that exchange rate volatility does increase with the global financial crises and detect the existence of an inverse relationship between the degree of flexibility in the exchange rate regime and RER volatility using a de facto exchange rate classification.
Este artículo examina los orígenes de la volatilidad del tipo de cambio real (RER) en ochenta países de todo el mundo durante el perido comprendido entre 1970 y 2011. Nuestro principal objetivo es explorar el papel jugado por el tipo de cambio nominal en sus distintas versiones y su comportamiento y efectos sobre la crisis financiera explicado a través de la volatilidad RER. Para lograrlo empleamos dos procedimientos complementarios que consisten en detectar las rupturas estructurales en las series RER y descomponer la volatilidad en componentes transitorios y permanentes. Los resultados confirman que la volatilidad del tipo de cambio se incrementa en el periodo de la crisis financiera y detecta la existencia de una relación inversa entre el grado de flexibilidad del régimen del tipo de cambio y la volatilidad RER usando una clasificación de facto del tipo de cambio.
The authors wish to thank Jushan Bai and Pierre Perron for kindly providing us with the GAUSS code for computations of their tests to detect multiple structural breaks and Ethan Ilzetzki for kindly providing us with the updated database on exchange rate arrangements. The authors gratefully acknowledge financial support from the Spanish Ministry of Economy and Competitiveness (projectECO2011-23189).
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