Will the Secular Decline In Exchange Rate and Inflation Volatility Survive COVID-19?

Ethan Ilzetzki, Carmen Reinhart and Kenneth Rogoff

No 28108, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Over the 21st century, and especially since 2014, global exchange rate volatility has been trending downwards, notably among the core G3 currencies (dollar, euro and the yen), and to some extent the G4 (including China). This stability continued through the Covid-19 recession to date: unusual, as exchange volatility generally rises in US recessions. Compared to measures of stock price volatility, exchange rate volatility rivals the lows reached in the heyday of Bretton Woods I. This paper argues that the core driver is convergence in monetary policy, reflected in a sharp-reduction of inflation and short- and especially long-term interest rate differentials. This unprecedented stability, which partially extends to emerging markets, is strongly reinforced by expectations that the zero bound will be significantly binding for advanced economies for years to come. We consider various hypotheses and suggest that the shutdown of monetary volatility is the leading explanation. The concluding part of the paper cautions that systemic economic crises often produce major turning points, so a collapse of the Extended Bretton Woods II regime cannot be ruled out.

JEL-codes: E5 F3 F4 N2 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac, nep-mon and nep-ore
Note: IFM ME
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Citations: View citations in EconPapers (19)

Published as Ethan Ilzetzki & Carmen M. Reinhart & Kenneth S. Rogoff, 2020. "Will the Secular Decline in Exchange Rate and Inflation Volatility Survive COVID-19?," Brookings Papers on Economic Activity, vol 2020(3), pages 279-332.

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Journal Article: Will the Secular Decline in Exchange Rate and Inflation Volatility Survive COVID-19? (2020)
Working Paper: Will the secular decline in exchange rate and inflation volatility survive COVID-19? (2020)
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