Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis

Monzur Hossain ()

Bangladesh Development Studies, 2010, vol. 33, issue 4, 1-22

Abstract: This paper analyses volatility of real effective exchange rates (REER) of 18 countries for the post-Bretton Woods period (1978-2004) using the Markov chain model framework. The results suggest that although short- term volatility is significantly higher in floating regimes, this regime helps to adjust long-term real shocks. Developmental stages do not have any significant impact on REER vola tility; however, lower developmental stage helps REER adjustments to long-term real shocks. Estimated steady-state probabilities suggest that by diverging from de jure exchange rate regime, developing countries can gain more stability than those of developed countries. Steady-state pr obabilities also suggest that on average it takes around 20 months to converge to equilibrium , which provides an explanation to (relative) purchasing power parity (PPP). Therefore, it may be concluded that exchange rate regimes and developmental stages are not fully neutral to real exchange rate volatility.

Keywords: Currency Regime; Exchange Rate Volatility; Developmental Stage (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
Date: 2010
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Working Paper: Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis (2009)
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