IMF Support and Inter-Regime Exchange Rate Volatility |
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Authors: | Ivo J M Arnold Ronald MacDonald Casper G de Vries |
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Institution: | (1) Universiteit Nyenrode, Straatweg 25, 3621 BG Breukelen, The Netherlands;(2) Department of Economics, University of Glasgow, Adam Smith Building, Room S102, Glasgow, G12 8RT, Scotland, United Kingdom;(3) Erasmus University Rotterdam and Tinbergen Institute, H8-33, PO Box 1738, 3000 DR Rotterdam, The Netherlands |
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Abstract: | It is widely agreed that when moving from fixed to floating exchange rates the increase in exchange rate volatility is not
matched by an equivalent rise in the volatility of fundamentals. We argue and demonstrate that in inter-regime comparisons
one has to account for ‘missing variables’ that compensate for the fundamental variables’ volatility under fixed exchange
rates. Previous studies have often used foreign exchange reserves, but without much success. We argue why reserves are not
a reliable measure, while IMF credit support is. Our empirical analysis identifies IMF support as a crucial and significant
compensating variable. |
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