Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications

Marek Dąbrowski, Monika Papież and Sławomir Śmiech ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper raises the question of whether the exchange rate regime matters for output volatility. Using the two de facto exchange rate regime classifications, it is demonstrated that the answer to this question is conditional ‘yes’. The key finding is that the exchange rate regime modifies the importance of determinants of output volatility rather than impacts it directly. This point is explained within a macroeconomic model of an open economy and is corroborated with empirical evidence for 48 advanced and emerging market economies. It is found that under the pegged regime the trade openness contributes to a reduction in output volatility, whereas the financial development has an opposite effect. Moreover, bigger economies experience lower output volatility irrespective of the exchange rate regime, albeit the beneficial size effect is stronger under floating regimes. The results do not depend on the classification employed to identify de facto pegs and floats.

Keywords: exchange rate regime; output volatility; open economy macroeconomics; panel regressions (search for similar items in EconPapers)
JEL-codes: C23 F33 F41 (search for similar items in EconPapers)
Date: 2021-04-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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Journal Article: Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:107133

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