Measuring real exchange rate instability in developing countries : empirical evidence and implications

Abstract

Exchange rate policy has received renewed attention because of its prominent role in adjustment programs. Several analysts have examined the impact of real exchange rate uncertainty on the performance of such economic variables as GDP growth, exports, and investment. The author uses data on the real exchange rate for 56 developing countries with managed exchange rates to make three points. First, the distribution of annual changes in real exchange rates is highly non-normal - both skewness and excess kurtosis. Secondly, this asymmetric non-normality implies that the common practice of using the standard deviation (or coefficient of variation) to compare real exchange rate uncertainty across countries is not justified. Finally, empirically, the higher order moments (skewness and kurtosis) are at least as important as the standard deviation in explaining cross-country performance.Macroeconomic Management,Achieving Shared Growth,Economic Stabilization,Statistical&Mathematical Sciences,Economic Theory&Research