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The long-run volatility puzzle of the real exchange rate

Authors
Journal
Journal of International Money and Finance
0261-5606
Publisher
Elsevier
Publication Date
Volume
25
Issue
1
Identifiers
DOI: 10.1016/j.jimonfin.2005.10.006
Keywords
  • Real Exchange Rate
  • Volatility

Abstract

Abstract This paper documents large cross-country differences in the long-run volatility of the real exchange rate. 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 shows that this difference in volatility cannot be explained by the fact that developing countries face larger shocks (both real and nominal), recurrent currency crises or by different elasticities to these shocks. ARCH estimations find 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.

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