Exchange Rate Volatility and Output Volatility: a Theoretical Approach

Maria Grydaki () and Stilianos Fountas

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: This paper makes an attempt to determine the factors influencing exchange rate and exchange rate uncertainty, as well as, output and output variability. In the context of a small open economy under flexible exchange rates regime it is found that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output and trade balance. Further, the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. Finally, it is shown that the effect of the determinants either of exchange rate volatility or output volatility is very sensitive to the parameter values.

Keywords: Vexchange rate volatility; output volatility; open-economy models. (search for similar items in EconPapers)
JEL-codes: E32 F31 F41 (search for similar items in EconPapers)
Date: 2008-12, Revised 2008-12
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-opm
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Journal Article: Exchange Rate Volatility and Output Volatility: A Theoretical Approach* (2009)
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