Working Paper: CEPR ID: DP838
Authors: Robert P. Flood; Andrew K. Rose
Abstract: Fixed exchange rates are less volatile than floating rates. The volatility of macroeconomic variables, such as money and output, does not change very much across exchange rate regimes, however. This suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful. It also suggests that there is no clear trade-off between reduced exchange rate volatility and macroeconomic stability.
Keywords: Structural; Traditional; Volatility; Monetary; Fixed; Floating; Regime; Exchange Rates
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fixing exchange rates (F31) | Reduced volatility in exchange rates (F31) |
| Fixing exchange rates (F31) | Stability in the volatility of macroeconomic variables (E32) |
| Absence of systematic effects on volatility of macroeconomic variables during fixed vs floating regimes (F31) | Lack of significant confounding factors (C29) |
| Fixing exchange rates (F31) | Stabilization of the economy (E63) |