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Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis

Author

Listed:
  • Hossain, Monzur

    (Former Senior Research Fellow, Bangladesh Institute of Dev elopment Studies (BIDS).)

Abstract

This paper analyses volatility of real effective exchange rates (REER) of 18 countries for the post-Bretton Woods period (1978-2004) using the Markov chain model framework. The results suggest that although short- term volatility is significantly higher in floating regimes, this regime helps to adjust long-term real shocks. Developmental stages do not have any significant impact on REER vola tility; however, lower developmental stage helps REER adjustments to long-term real shocks. Estimated steady-state probabilities suggest that by diverging from de jure exchange rate regime, developing countries can gain more stability than those of developed countries. Steady-state pr obabilities also suggest that on average it takes around 20 months to converge to equilibrium , which provides an explanation to (relative) purchasing power parity (PPP). Therefore, it may be concluded that exchange rate regimes and developmental stages are not fully neutral to real exchange rate volatility.

Suggested Citation

  • Hossain, Monzur, 2010. "Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 33(4), pages 1-22, December.
    • Handle: RePEc:ris:badest:0503
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    References listed on IDEAS

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    More about this item

    Keywords

    Currency Regime; Exchange Rate Volatility; Developmental Stage;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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