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Real exchange rate volatility, financial crises and exchange rate regimes

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This article examines real exchange rate (RER) volatility in 80 countries around the world, during the period 1970 to 2011. Two main questions are raised: are structural breaks in RER volatility related to changes in exchange rate regimes or financial crises? And do these two events affect the permanent and transitory components of RER volatility? To answer these, we employ two complementary procedures that consist in detecting structural breaks in the RER series and decomposing volatility into its permanent and transitory components. Our results suggest that structural breaks in RER volatility coincidence with financial crises and certain changes in nominal exchange rate regimes. Moreover, our findings confirm that RER volatility does increase with the global financial crises and detect that the more flexible the exchange rate regime, the higher the volatility of the RER using a de facto exchange rate classification.
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Keywords: C22; C54; F33; G01; component-GARCH model; financial crisis; real exchange rates; structural breaks

Document Type: Research Article

Affiliations: 1: Department of Economic Theory and History, Universidad de Málaga, Campus El Ejido, 29071, Málaga, Spain 2: Department of Quantitative Economics, Universidad Complutense de Madrid, Campus de Somosaguas, 28223, Madrid, Spain

Publication date: 14 March 2014

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