Exchange Rate Volatility, Monetary Policy, and Capital Mobility: Empirical Evidence on the Holy Trinity

Andrew Rose

No 4630, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses a panel of data from twenty-two countries between 1967 and 1992 to explore the tradeoff between the 'Holy Trinity' of fixed exchange rates, independent monetary policy, and capital mobility. I use: flexible- and sticky-price monetary exchange rate models to parameterize monetary divergence; factor analysis to extract measures of capital mobility from a variety of different indicators; and conditional exchange rate volatility to measure the degree to which the exchange rate is fixed. Exchange rate volatility is loosely linked to both monetary divergence and the degree of capital mobility. Interestingly, exchange rate volatility is significantly correlated with the width of the explicitly declared exchange rate band, even after taking monetary divergence and capital mobility into account.

JEL-codes: F31 F33 (search for similar items in EconPapers)
Date: 1994-01
Note: IFM
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Citations: View citations in EconPapers (11)

Published as JIMF, 1996

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Working Paper: Exchange Rate Volatility, Monetary Policy, and Capital Mobility: Empirical Evidence on the Holy Trinity (1994)
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