Working Paper: CEPR ID: DP1982
Authors: Tamim Bayoumi; Barry Eichengreen
Abstract: We show that the variables pointed to by the theory of optimum currency areas (OCAs) help to explain patterns of exchange rate variability and intervention across countries. But OCA considerations affect exchange market pressures and intervention in different ways. Exchange market pressures mainly reflect asymmetric shocks, while intervention largely reflects the variables that OCA theory suggests cause countries to value stable exchange rates (small size and the extent of trade links). Intervention and exchange market pressure also vary with the structure of the international monetary system.
Keywords: exchange rate volatility; optimum currency areas; intervention
JEL Codes: F31; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| OCA variables (C29) | variability of bilateral exchange rates (F31) |
| asymmetric shocks to output (F41) | exchange market pressure (F31) |
| exchange market pressure (F31) | exchange rate volatility (F31) |
| country size and trade linkages (F10) | intervention in foreign exchange market (F31) |
| increased intervention (I24) | reduced volatility in exchange rates (F31) |
| higher asymmetric shocks (C69) | increased market pressures (L19) |