Soft power and exchange rate volatility
Serhan Cevik (),
Richard Harris () and
International Finance, 2017, vol. 20, issue 3, 271-288
Standard modelsâ€”based exclusively on macroâ€ financial variablesâ€”have made little progress in explaining the behaviour of exchange rates. In this paper, we introduce a neglected set of â€˜soft powerâ€™ factors capturing a country's demographic, institutional, political, and social underpinnings to shed some light on the â€˜missingâ€™ determinants of exchange rate volatility over time and across countries. Based on a balanced panel dataset comprising 115 countries during the period 1996â€“2015, the empirical results are generally robust across different estimation methodologies and show a high degree of persistence in exchange rate volatility. After controlling for standard macroeconomic factors, we find that the â€˜soft powerâ€™ variablesâ€”such as an index of voice and accountability, life expectancy, educational attainments, fragility of the banking sector, financial openness, and the share of agriculture relative to servicesâ€”have a statistically significant influence on the level of exchange rate volatility across countries. In other words, countries with greater â€˜soft powerâ€™ (i.e. better institutional quality) tend to experience a lower degree of exchange rate volatility.
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Working Paper: Soft Power and Exchange Rate Volatility (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:intfin:v:20:y:2017:i:3:p:271-288
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