The long-run volatility puzzle of the real exchange rate

By Ricardo Hausmann, U. Panizza, Roberto Rigobon. 2006

154 citations recorded by the source corpus.

This paper documents large cross-country differences in the long run volatility of the real exchange rate. In particular, it shows that the real exchange rate of developing countries is approximately three times more volatile than the real exchange rate in industrial countries. The paper tests whether this difference in volatility can be explained by the fact that developing countries face larger shocks (both real and nominal) and recurrent currency crises or by different elasticities to these shocks. It finds that the magnitude of the shocks and the differences in elasticities can only explain a small part of the difference in RER volatility between developing and industrial countries. Results from ARCH estimations confirm that there is a substantial difference in long term volatilities between these two sets of countries and indicate that there is also a much higher persistence of deviations of the variance of the RER from its long run value when the economy suffers shocks of various kinds.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/083dbed668340d574c8b7c1dba1b9986e7daef90

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Citations in the corpus

Exchange Rate Volatility and Productivity Growth: The Role of Financial Development (2009, unknown): “[36] Hausmann, R.”
On the Causes and Effects of Exchange Rate Volatility on Economic Growth: Evidence from Ghana (2017, background): “Hausmann, Panizza, and Rigobon (2006) reveal that developing countries’ real exchange rate is more volatile than that of industrialized countries on account of high exposure to shocks (both real and nominal) by variations in the sensitivity of real exchange rate to shocks.”
Monetary Policy in Emerging Markets (2010, background): “5 Hausmann, Panizza, and Rigobon (2006) find that real exchange rate volatility is three times higher in developing countries than in industrialized countries (but that the difference is not attributable to larger shocks).”
Non-Linear Exchange Rate Pass-Through in Emerging Markets (2016, background): “Hausmann et al. (2006) also identify high levels of exchange rate pass-through as one of the reasons for central banks to be concerned about exchange rate movements.”
Jobs for Shared Prosperity: Time for Action in the Middle East and North Africa (2013, background): “It dims the prospects for development in more dynamic sectors of the economy that are not capital intensive and have higher potential to create employment (see Hausmann, Panizza, and Rigobon 2004).”
The dynamics of exchange rate volatility: A panel VAR approach (2014, background): “The literature provides ample evidence with respect to the variables that may impact the overall volatility (e.g., Kanas, 2002; Devereux and Lane, 2003; Hausmann et al., 2006; Ganguly and Breuer, 2010; Giannellis and Papadopoulos, 2011; Berganza and Broto, 2012).”