research
COULD THE EXCHANGE RATE REGIME REDUCE MACROECONOMIC VOLATILITY?
- Publication date
- Publisher
Abstract
This study intends to determine the kind of relationship existing between the exchange rate regime and real volatility. After carefully revising theoretical and empirical results of previous research, a new methodology is proposed that corrects deficiencies found in previous empirical papers. The results show non-neutrality of the exchange rate regime. Particularly, it is found that the more rigid the regime, the greater the real volatility. Even when a classification of the exchange rate regime is performed allowing a comparison between consistent pegging and consistent floating, the former has a higher volatility. Countries with "fear of floating" or "inability of pegging" behavior exhibit lower volatility than consistent pegs.