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Exchange Rate Volatility and Output Volatility: A Theoretical Approach

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  • Maria Grydaki
  • Stilianos Fountas

Abstract

This paper makes an attempt to determine the factors influencing exchange rate and exchange rate uncertainty, as well as output and output variability. In the context of a small open economy under flexible exchange rates regime it is found that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output, and trade balance. Further, the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. Finally, it is shown that the effect of the determinants either of exchange rate volatility or output volatility is very sensitive to the parameter values.

Suggested Citation

  • Maria Grydaki & Stilianos Fountas, 2009. "Exchange Rate Volatility and Output Volatility: A Theoretical Approach," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 552-569, August.
    • Handle: RePEc:bla:reviec:v:17:y:2009:i:3:p:552-569
    DOI: 10.1111/j.1467-9396.2009.00833.x
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    4. Dąbrowski, Marek A. & Papież, Monika & Śmiech, Sławomir, 2024. "Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 894-908.
    5. Maria Grydaki & Stilianos Fountas, 2010. "What Explains Nominal Exchange Rate Volatility? Evidence from the Latin American Countries," Discussion Paper Series 2010_10, Department of Economics, University of Macedonia, revised Jul 2010.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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