Variance Bounds as Thresholds for Excessive Currency Volatility Inflation Targeting Emerging Economies

Shaista Amod and Shakill Hassan

No 6516, Working Papers from South African Reserve Bank

Abstract: At what level does a currencys volatility become excessive, in a concrete sense? Any claim that an exchange rate is excessively volatile needs a benchmark for normal variability. We compute variance bounds implied by exchange rate models as the norm, for a set of particularly volatile emerging market currencies; and find that long-run exchange rate volatility does not breach the upper bound implied by the present value of underlying fundamentals - for each currency in our sample, except the Brazilian real. However, nominal exchangerate variances get closer to implied upper bounds under inflation targeting. We also find a reduction in real exchange rate misalignment under inflation targeting.

Date: 2014-12-02
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Persistent link: https://EconPapers.repec.org/RePEc:rbz:wpaper:6516

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