Exchange rate instability: relative volatility, risk and adjustment speed

Researchers focusing on how currency values change and are managed have yet to show how relative measures could help track instability and also help rank countries by relative measures rather than measures based on each currency. The aim of this chapter is to provide ideas towards this end to measure currency instability and then to rank currency risk. We also test how these measures stand up. Exchange rate volatility has been at the center of several financial crises normally leading to economic declines, which usually also precipitate financial instability. Much has been written about how countries manage their exchange rates in order to promote economic growth, especially sustainable trade, by designing proper exchange rate regimes. Exchange rate stability has been a pillar within economic policy circles ever since the 1946 Bretton Woods arrangement, which replaced the US$ and gold standard with free-floating or other currency management regimes, came unstuck in 1973. How good currency stability is achieved by a given country could be measured using four concepts: relative volatility; interquartile range; degree of cointegration; and speed of adjustment to the benchmark currencies of peers. We explore these ideas in relation to the experiences of 14 countries over some 26 years.