The Long-Run Volatility Puzzle of the Real Exchange Rate

Ricardo Hausmann, Ugo Panizza and Roberto Rigobon

No 10751, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper documents large cross-country differences in the long run volatility of the real exchange rate. In particular, it shows that the real exchange rate of developing countries is approximately three times more volatile than the real exchange rate in industrial countries. The paper tests whether this difference in volatility can be explained by the fact that developing countries face larger shocks (both real and nominal) and recurrent currency crises or by different elasticities to these shocks. It finds that the magnitude of the shocks and the differences in elasticities can only explain a small part of the difference in RER volatility between developing and industrial countries. Results from ARCH estimations confirm that there is a substantial difference in long term volatilities between these two sets of countries and indicate that there is also a much higher persistence of deviations of the variance of the RER from its long run value when the economy suffers shocks of various kinds.

JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-ets, nep-fin and nep-ifn
Note: IFM
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Citations: View citations in EconPapers (20)

Published as Hausmann, Ricardo, Ugo Panizza and Roberto Rigobon. "The Long-Run Volatility Puzzle Of The Real Exchange Rate," Journal of International Money and Finance, 2006, v25(1,Feb), 93-124.

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Journal Article: The long-run volatility puzzle of the real exchange rate (2006)
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