Working Paper: NBER ID: w1930
Authors: Sebastian Edwards
Abstract: The purpose of this paper is to investigate the potential role of monetary and real factors in explaining real exchange rate variability in developing countries. For this purpose two indexes of real effective exchange rate variability that measure short-term and long-term variability were constructed for 30 countries. The results obtained, using a generalized least squares procedures on cross section data, indicate that real exchange rate variability has been affected both by real and monetary factors. In particular it was found that more unstable nominal exchange rate policies were reflected in higher real exchange rate instability in the short-run; more unstable domestic credit policies resulted in higher short-term real exchange rate variability; and more unstable external terms of trade also affected positively the degree of real exchange rate instability.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unstable nominal exchange rate policies (F31) | higher real exchange rate instability (F31) |
| unstable domestic credit policies (F32) | higher short-term real exchange rate variability (F31) |
| instability of external terms of trade (F14) | higher real exchange rate variability (F31) |