Exchange Rate Volatility in Integrating Capital Markets / Giancarlo Corsetti, Vittorio Grilli, Nouriel Roubini.

By:

Corsetti, Giancarlo

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w3570.Publication details: Cambridge, Mass. National Bureau of Economic Research 1990.Description: 1 online resource: illustrations (black and white)Subject(s):

F - International Economics

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Abstract: This paper investigates the relationship between international capital liberalization and exchange rate volatility. While the effects of a capital controls liberalization on the transaction volume in the foreign exchange market are theoretically unambiguous, the effects on the volatility of exchange rate can have either sign. On one hand, the liberalization leads to increasing economy-wide and investor-specific uncertainty. On the other hand, the augiented number of participants in the market should reduce exchange rate fluctuations. The uncertainty effects should be dominant in the short run, while the increase in the number of traders in the longer run should make the market thicker and tend to reduce volatility. It is shown that, for a sample of countries which have liberalized capital controls in the last 15 years, structural breaks in the process generating exchange rate volatility have occurred very close to the time when liberalization measures were implemented. The results also suggest an increase in volatility after the structural breakpoint.

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Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w3570 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

December 1990.

This paper investigates the relationship between international capital liberalization and exchange rate volatility. While the effects of a capital controls liberalization on the transaction volume in the foreign exchange market are theoretically unambiguous, the effects on the volatility of exchange rate can have either sign. On one hand, the liberalization leads to increasing economy-wide and investor-specific uncertainty. On the other hand, the augiented number of participants in the market should reduce exchange rate fluctuations. The uncertainty effects should be dominant in the short run, while the increase in the number of traders in the longer run should make the market thicker and tend to reduce volatility. It is shown that, for a sample of countries which have liberalized capital controls in the last 15 years, structural breaks in the process generating exchange rate volatility have occurred very close to the time when liberalization measures were implemented. The results also suggest an increase in volatility after the structural breakpoint.