Does Higher Openness Cause More Real Exchange Rate Volatility?

The "New Open Economy Macroeconomics" argues that: (a) non-monetary factors have gained importance in explaining exchange rate volatility, and (b) trade and financial openness may have a potential role of mitigating and/or amplifying real and nominal shocks to real exchange rates. The goal of the present paper is to examine the ability of trade and financial openness to exacerbate or mitigate real exchange rate volatility. The authors collected information on the real effective exchange rate, its fundamentals, and (outcome and policy measures of) trade and financial openness for a sample of industrial and developing countries for the period 1975-2005. Using instrumental variables techniques, the analysis finds that: (a) High real exchange rate volatility is the result of highly volatile productivity shocks, and sharp oscillations in monetary and fiscal policy shocks. (b) Countries more integrated with international markets of goods and services tend to display more stable real exchange rate fluctuations. (c) Financial openness seems to amplify the fluctuations in real exchange rates. (d) The composition of trade and capital flows plays a role in explaining the smoothing properties of trade and financial openness. Although the former is mainly driven by manufacturing trade, the latter depends on the share of debt (and equity) in total foreign liabilities. (e) Financial openness would attenuate (magnify) real exchange rate volatility, the greater the share of equity (debt) in foreign liabilities. (f) The composition of flows also matters for explaining the smoothing properties of trade and financial openness in periods of currency crisis.

Bibliographic Details

Main Authors:	Calderón, César, Kubota, Megumi
Language:	English
Published:	2009-04-01
Subjects:	ACCOUNTING, ADVANCED ECONOMIES, BANK POLICY, BILATERAL EXCHANGE RATE, BILATERAL TRADE, BLACK MARKET, BOND, BONDS, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL ACCOUNT, CAPITAL ACCOUNT RESTRICTIONS, CAPITAL ACCOUNT TRANSACTIONS, CAPITAL FLOW, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITAL MARKETS, CAPITAL MOBILITY, CAPITAL STRUCTURE, CD, CENTRAL BANK, CIVIL CODE, COMMODITIES, CONSUMER PRICE INDEX, CONSUMPTION SMOOTHING, COUNTRY DUMMIES, CREDITOR, CROSS-BORDER TRANSACTIONS, CURRENCY, CURRENCY CRISES, CURRENCY CRISIS, CURRENCY UNION, CURRENT ACCOUNT TRANSACTIONS, DEBT, DEBT ACCUMULATION, DEBT FLOWS, DEBT LEVELS, DEBT-EQUITY, DEBTOR, DEBTOR COUNTRY, DEGREE OF RISK, DEPENDENT VARIABLE, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPING ECONOMIES, DOMESTIC FINANCIAL MARKETS, DOMESTIC INTEREST RATES, DUMMY VARIABLE, DUMMY VARIABLES, ECONOMIC PERFORMANCE, ECONOMIC REFORM, ECONOMIC STRUCTURE, EMERGING MARKET, EMERGING MARKET ECONOMIES, EMERGING MARKETS, EQUITY FLOWS, EXCHANGE ARRANGEMENTS, EXCHANGE RATE, EXCHANGE RATE DYNAMICS, EXCHANGE RATE FLUCTUATIONS, EXCHANGE RATE INSTABILITY, EXCHANGE RATE REGIME, EXCHANGE RATE REGIMES, EXCHANGE RATE SYSTEMS, EXCHANGE RATE VOLATILITY, EXCHANGE RATES, EXPOSURE, FINANCIAL DERIVATIVES, FINANCIAL DEVELOPMENT, FINANCIAL FLOW, FINANCIAL FLOWS, FINANCIAL INTEGRATION, FINANCIAL MARKET, FINANCIAL MARKET INTEGRATION, FINANCIAL MARKETS, FINANCIAL OPENNESS, FINANCIAL SHOCKS, FINANCIAL TRANSACTIONS, FISCAL CONSOLIDATION, FISCAL POLICIES, FISCAL POLICY, FISCAL SHOCKS, FIXED EXCHANGE RATE, FIXED EXCHANGE RATES, FIXED RATES, FLEXIBLE EXCHANGE RATE, FLEXIBLE EXCHANGE RATE REGIME, FLEXIBLE EXCHANGE RATE REGIMES, FLEXIBLE EXCHANGE RATES, FLOATING EXCHANGE RATE, FLOW OF CAPITAL, FOREIGN ASSET, FOREIGN ASSET POSITION, FOREIGN ASSETS, FOREIGN DEBT, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, FOREIGN EXCHANGE RATE, FOREIGN LIABILITIES, FOREIGN TRADE, FREE TRADE, GENERAL EQUILIBRIUM, GENERAL EQUILIBRIUM MODEL, GLOBALIZATION, GOLD, GOLD STANDARD, GOVERNMENT EXPENDITURE, GOVERNMENT SPENDING, GRAVITY MODEL, HOLDING, HOLDINGS, HOME COUNTRY, IMPACT OF SHOCKS, IMPERFECT CAPITAL MOBILITY, IMPORT, INCOME, INCOME GROUPS, INCOME LEVEL, INCOME LEVELS, INDUSTRIAL COUNTRIES, INFLATION, INFLATION RATE, INFLATION RATES, INSTRUMENT, INSTRUMENTAL VARIABLES, INSURANCE, INTEREST RATE, INTEREST RATE DIFFERENTIALS, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL FLOWS, INTERNATIONAL CAPITAL MARKETS, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCE, INTERNATIONAL FINANCIAL INTEGRATION, INTERNATIONAL FINANCIAL MARKETS, INTERNATIONAL FINANCIAL STATISTICS, INTERNATIONAL MARKETS, INTERNATIONAL TRADE, LEVY, LIABILITY, LIBERALIZATION, LOAN, LOCAL CURRENCY, LOW-INCOME COUNTRIES, MACROECONOMIC UNCERTAINTY, MACROECONOMIC VOLATILITY, MAJOR CURRENCIES, MARKET INTEGRATION, MIDDLE-INCOME COUNTRIES, MONETARY AGGREGATES, MONETARY AUTHORITIES, MONETARY FUND, MONETARY INSTABILITY, MONETARY MODELS, MONETARY POLICIES, MONETARY POLICY, MONETARY STABILITY, MONEY DEMAND, MONEY SUPPLY, MONOPOLY, NATURAL RESOURCES, OIL PRICES, OPEN ECONOMIES, OPEN ECONOMY, OUTPUT, POLITICAL ECONOMY, POLITICAL RISK, PORTFOLIO, PRIVATE INVESTMENT, PRODUCTION STRUCTURE, PUBLIC POLICY, RATE OF GROWTH, REAL EFFECTIVE EXCHANGE RATE, REAL EFFECTIVE EXCHANGE RATES, REAL ESTATE, REAL EXCHANGE RATE, REAL EXCHANGE RATES, REAL INTEREST, REAL INTEREST RATES, REAL SHOCKS, REGRESSION ANALYSIS, RESERVES, RETURN, RETURNS, RISK SHARING, SHARE OF EQUITY, SMALL COUNTRY, SPEED OF ADJUSTMENT, STEADY STATE, STOCKS, SUPPLY SHOCKS, SUPPLY SIDE, TRADE LIBERALIZATION, TRADE OPENNESS, TRADE REGIME, TRADE REGIMES, TRADE SHOCKS, TRADING, VOLATILITY, WORLD DEVELOPMENT INDICATORS, WORLD MARKETS,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090408093735 https://hdl.handle.net/10986/4090
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