Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics

Robert Flood () and Andrew Rose

No 1944, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Exchange rate regimes differ primarily by the activity of the exchange rate, not observable macroeconomic ‘fundamentals’. Fixed exchange rates are typically stable and floating exchange rates are volatile, but macro phenomena are regime-independent. Fundamentals only seem to be relevant for exchange rates at low frequencies or when inflation is high. A basic task of international finance is explaining these cross-regime differences in exchange rate volatility. The evidence suggests that a switch in exchange rate policy is accompanied by a change in market structure; macroeconomic considerations are superfluous. We formalize this observation in a non-linear model with multiple equilibria.

Keywords: Equilibrium; Frequency; Linear; Monetary; Multiple; Noise; Regime; shock (search for similar items in EconPapers)
JEL-codes: F33 G15 (search for similar items in EconPapers)
Date: 1998-08
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Citations: View citations in EconPapers (12)

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Journal Article: Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics (1999)
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