The Financial Development, Macroeconomic Stability, and Exchange Rate Volatility

Sang-Yong Joo, Han-Gwang Choo and Do-Sun Hong
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Sang-Yong Joo: Sejong University
Han-Gwang Choo: Sejong University
Do-Sun Hong: Sejong University

Korean Economic Review, 2002, vol. 18, 69-87

Abstract: We investigated the connection between the exchange rate volatility and the underlying fundamental volatility, and found that the two volatilities are correlated. This finding indicates that a flexible exchange rate need not be an unstable exchange rates and domestic macroeconomic stabilization policy aimed at reducing exchange rate volatility is still valid and important. For institutional factors reducing the fundamentals volatility associated with exchange rate fluctuations, we found the importance of two factors: the financial development and the reduction in exchange and capital controls. Various indices of them are found to affect macroeconomic stability. There seems to exist some underlying driving force between financial underdevelopment, macroeconomic instability, and exchange rate volatility all at the same time.

Keywords: Financial development; macroeconomic stability; exchange rate volatility (search for similar items in EconPapers)
JEL-codes: E42 E44 F33 (search for similar items in EconPapers)
Date: 2002
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