Working Paper: NBER ID: w4503
Authors: Robert P. Flood; Andrew K. Rose
Abstract: Fixed exchange rates are less volatile than floating rates. But the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes. 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 tradeoff between reduced exchange rate volatility and macroeconomic stability.
Keywords: Exchange Rates; Volatility; Macroeconomic Fundamentals
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed exchange rates (F31) | reduced exchange rate volatility (F31) |
| reduced exchange rate volatility (F31) | no significant effects on macroeconomic volatility (E39) |
| fixed exchange rates (F31) | stabilize exchange rate volatility without causing volatility in other areas (F31) |
| exchange rate stability (F31) | no systematic effects on volatility of other macroeconomic variables (E39) |
| volatility characteristics of macroeconomic variables (E32) | do not mimic those of OECD exchange rates (F31) |
| significant determinants of exchange rate volatility (F31) | not found within traditional macroeconomic variables (E19) |
| microeconomic factors affecting money market equilibrium (E49) | do not align with observed data (Y10) |