Fundamental Volatility is Regime Specific

Ivo Arnold (), Ronald MacDonald and Casper de Vries

Working Papers from Business School - Economics, University of Glasgow

Abstract: A widely held notion holds that freely floating exchange rates are excessively volatile when judged against fundamentals and when moving from fixed to floating exchange rates. We re-examine the data and conclude that the disparity between the fundamentals and exchange rate volatility is more apparent than real, especially when the Deutsche Mark, rather than the dollar is chosen as the numeraire currency. We also argue, and indeed demonstrate, that in cross-regime comparisons one has to account for certain ‘missing variables’ which compensate for the fundamental variables’ volatility under fixed rates.

JEL-codes: F31 (search for similar items in EconPapers)
Date: 2005-11
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2005_22

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