Working Paper: NBER ID: w10751
Authors: Ricardo Hausmann; Ugo Panizza; Roberto Rigobon
Abstract: This paper documents large cross-country differences in the long run volatility of the real exchange rate. In particular, it shows that the real exchange rate of developing countries is approximately three times more volatile than the real exchange rate in industrial countries. The paper tests whether this difference in volatility can be explained by the fact that developing countries face larger shocks (both real and nominal) and recurrent currency crises or by different elasticities to these shocks. It finds that the magnitude of the shocks and the differences in elasticities can only explain a small part of the difference in RER volatility between developing and industrial countries. Results from ARCH estimations confirm that there is a substantial difference in long term volatilities between these two sets of countries and indicate that there is also a much higher persistence of deviations of the variance of the RER from its long run value when the economy suffers shocks of various kinds.
Keywords: Real Exchange Rate; Volatility; Developing Countries; Industrial Countries
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Terms of trade shocks (F14) | RER volatility (E32) |
| GDP growth shocks (Q43) | RER volatility (E32) |
| Inflation changes (E31) | RER volatility (E32) |
| Currency crises (F31) | RER volatility (E32) |
| Persistence of shocks (E32) | RER volatility (E32) |
| Differences in structural and institutional characteristics (O17) | RER volatility (E32) |
| Developing countries (O10) | Higher long-run volatility of RER (F31) |
| RER volatility (E32) | Differences in structural and institutional characteristics (O17) |