IMF Support and Inter-regime Exchange rate Volatility

Ivo Arnold (), Ronald MacDonald () and Casper G. de Vries ()

Working Papers from Department of Economics, University of Glasgow

Abstract: A widely held notion is that freely floating exchange rates are excessively volatile when moving from fixed to floating exchange rates. We re-examine the data and conclude that the disparity between the fundamentals and exchange rate volatility is more apparent than real, especially when the Deutsche Mark, rather than the dollar, is chosen as the numeraire currency. We argue and demonstrate that in inter-regime comparisons one has to account for certain ‘missing variables’ which compensate for the fundamental variables’ volatility under fixed exchange rates. We show that IMF credit support is a crucial compensating variable.

Keywords: Exchange rates; Exchange rate regimes; Excess volatility; IMF credit (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-ifn
Date: 2007-06
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Persistent link: http://EconPapers.repec.org/RePEc:gla:glaewp:2007_37

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