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Modeling Exchange Rate Volatility

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  • Basher A. Balg
  • Hugh Metcalf

Abstract

This paper investigates the impact of the volatility of the underlying macroeconomic fundamentals on exchange rate volatility utilizing the bounds testing approach to cointegration. The results show that, in the long run the volatility of the money supply is the sole determinant, whereas in the short run overshooting is found.

Suggested Citation

  • Basher A. Balg & Hugh Metcalf, 2010. "Modeling Exchange Rate Volatility," Review of International Economics, Wiley Blackwell, vol. 18(1), pages 109-120, February.
    • Handle: RePEc:bla:reviec:v:18:y:2010:i:1:p:109-120
    DOI: 10.1111/j.1467-9396.2009.00872.x
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    References listed on IDEAS

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    1. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
    2. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
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    4. G De Vita & A Abbott, 2004. "Real Exchange Rate Volatility and US Exports: An ARDL Bounds Testing Approach," Economic Issues Journal Articles, Economic Issues, vol. 9(1), pages 69-78, March.
    5. Helena Marques & Hugh Metcalf, 2005. "What Determines Sectoral Trade in the Enlarged EU?," Review of Development Economics, Wiley Blackwell, vol. 9(2), pages 197-231, May.
    6. Chowdhury, Abdur R, 1993. "Does Exchange Rate Volatility Depress Trade Flows? Evidence from Error-Correction Models," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 700-706, November.
    7. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    8. Mah, Jai S., 2000. "An empirical examination of the disaggregated import demand of Korea--the case of information technology products," Journal of Asian Economics, Elsevier, vol. 11(2), pages 237-244.
    9. repec:bla:scandj:v:78:y:1976:i:2:p:229-48 is not listed on IDEAS
    10. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    11. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, vol. 11(5), pages 1131-1147, October.
    12. Annie Corbin, 2004. "Capital mobility and adjustment of the current account imbalances: a bounds testing approach to cointegration in 12 countries (1880-2001)," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(3), pages 257-276.
    13. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    14. Annie Corbin, 2004. "Capital mobility and adjustment of the current account imbalances : a bounds testing approach to cointegration in 12 countries (1880-2001)," Post-Print hal-00153832, HAL.
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    Cited by:

    1. Wang, Xinyu & Qi, Zikang & Huang, Jianglu, 2023. "How do monetary shock, financial crisis, and quotation reform affect the long memory of exchange rate volatility? Evidence from major currencies," Economic Modelling, Elsevier, vol. 120(C).
    2. Manuel González-Gómez, 2022. "European outbound tourism expansion on the islands of Cape Verde," Tourism Economics, , vol. 28(4), pages 1129-1150, June.
    3. Marilyne Huchet-Bourdon & Jane Korinek, 2011. "To What Extent Do Exchange Rates and their Volatility Affect Trade?," OECD Trade Policy Papers 119, OECD Publishing.
    4. Dengjun Zhang, 2015. "The trade effect of price risk: a system-wide approach," Empirical Economics, Springer, vol. 48(3), pages 1149-1167, May.
    5. You, Yu & Liu, Xiaochun, 2020. "Forecasting short-run exchange rate volatility with monetary fundamentals: A GARCH-MIDAS approach," Journal of Banking & Finance, Elsevier, vol. 116(C).

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