Exchange rate volatility and the time-varying effects of aggregate shocks

Victor (Vic) Valcarcel

Journal of International Money and Finance, 2013, vol. 32, issue C, 822-843

Abstract: This paper investigates the dynamics of the real exchange rate and relative output among the US and five of its top six trading partners since the collapse of Bretton Woods. It employs long-run restrictions to identify the usual suspect macroeconomic shocks and their relative importance for exchange rate fluctuations. An improvement of the econometric application is that it allows for the contribution of each shock to the real exchange rate and relative output to vary over time. While the volatility of US output – both total and relative to that of the UK or Canada – is estimated to have substantially reduced since the mid-1980s, consistent with the Great Moderation findings of many others, the volatility of real exchange rates has experienced a gradual and continuous increase over the same period. Monetary shocks account for only a small fraction of these dynamics, although they do track well the increase in volatility of US output during the Great Inflation period. It is supply-type shocks that seem to be more important for the relative output volatility reductions of the mid-1980s. Conversely, demand shocks seem to account for the largest portion of the volatility increases in the real exchange rate. Perhaps unsurprisingly, both volatilities increase during the 2007 financial crisis and the ensuing 2008–2009 Great Recession – periods associated with higher economic uncertainty.

Keywords: Bretton Woods; The Great Moderation; Stochastic volatility; Real exchange rates; Markov chain Monte Carlo; Structural vector autoregressions (search for similar items in EconPapers)
JEL-codes: E30 E41 E65 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560612001489
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:32:y:2013:i:c:p:822-843

DOI: 10.1016/j.jimonfin.2012.07.003

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().