Does Higher Openness Cause More Real Exchange Rate Volatility?

Our study investigates the factors driving RER volatility and the properties of both trade and financial openness to stabilize RERs. Therefore, this paper guides us to formulate better economic policies to lower RER variability. Our goal is to test whether the extent and composition of international...

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Main Authors: Calderon, Cesar, Kubota, Megumi
Format: Journal Article
Published: Elsevier 2018
Subjects:
Online Access:http://hdl.handle.net/10986/29230
id okr-10986-29230
recordtype oai_dc
spelling okr-10986-292302021-05-25T10:54:43Z Does Higher Openness Cause More Real Exchange Rate Volatility? Calderon, Cesar Kubota, Megumi REAL EXCHANGE RATE VOLATILITY FINANCIAL OPENNESS CAPITAL FLOWS TRADE OPENNESS TRADE POLICY TRADE LIBERALIZATION EXCHANGE RATES STRUCTURE OF TRADE DEBT EQUITY FLOWS Our study investigates the factors driving RER volatility and the properties of both trade and financial openness to stabilize RERs. Therefore, this paper guides us to formulate better economic policies to lower RER variability. Our goal is to test whether the extent and composition of international trade and financial integration would smooth the impact of shocks to the RER for 82 countries from 1974 to 2013. Our findings support existing theoretical models (Obstfeld and Rogoff, 1995; Hau, 2000). They confirm empirically that the composition of trade and financial openness matters for RER stabilization. We show that trade in manufacturing helps reduce RER volatility while non-manufacturing trade may contribute to higher RER volatility. Financial openness mitigates (amplifies) RER volatility in a country with higher (lower) share of foreign equity vis-à-vis foreign debt liabilities. A greater share of equity in external liabilities can improve the country's resilience to external shocks (Rogoff, 1999). Consequently, policies to lower RER volatility should account for a) the composition of financial openness as measured by the type of capital flows (i.e. equity vs. loan-related) accumulated in the domestic economy and b) the role of the structure of trade (i.e. manufacturing vs. non-manufacturing) in the transmission process of shocks to the RER. Our evidence relates to findings of mitigating effects on sudden stops of trade openness (Cavallo and Frankel, 2008), and equity- rather than debt-related financial openness (Levchenko and Mauro, 2007; Calderón and Kubota, 2013). 2018-01-24T17:06:17Z 2018-01-24T17:06:17Z 2018-01 Journal Article Journal of International Economics 0022-1996 http://hdl.handle.net/10986/29230 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Elsevier Publications & Research :: Journal Article Publications & Research
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
topic REAL EXCHANGE RATE
VOLATILITY
FINANCIAL OPENNESS
CAPITAL FLOWS
TRADE OPENNESS
TRADE POLICY
TRADE LIBERALIZATION
EXCHANGE RATES
STRUCTURE OF TRADE
DEBT
EQUITY FLOWS
spellingShingle REAL EXCHANGE RATE
VOLATILITY
FINANCIAL OPENNESS
CAPITAL FLOWS
TRADE OPENNESS
TRADE POLICY
TRADE LIBERALIZATION
EXCHANGE RATES
STRUCTURE OF TRADE
DEBT
EQUITY FLOWS
Calderon, Cesar
Kubota, Megumi
Does Higher Openness Cause More Real Exchange Rate Volatility?
description Our study investigates the factors driving RER volatility and the properties of both trade and financial openness to stabilize RERs. Therefore, this paper guides us to formulate better economic policies to lower RER variability. Our goal is to test whether the extent and composition of international trade and financial integration would smooth the impact of shocks to the RER for 82 countries from 1974 to 2013. Our findings support existing theoretical models (Obstfeld and Rogoff, 1995; Hau, 2000). They confirm empirically that the composition of trade and financial openness matters for RER stabilization. We show that trade in manufacturing helps reduce RER volatility while non-manufacturing trade may contribute to higher RER volatility. Financial openness mitigates (amplifies) RER volatility in a country with higher (lower) share of foreign equity vis-à-vis foreign debt liabilities. A greater share of equity in external liabilities can improve the country's resilience to external shocks (Rogoff, 1999). Consequently, policies to lower RER volatility should account for a) the composition of financial openness as measured by the type of capital flows (i.e. equity vs. loan-related) accumulated in the domestic economy and b) the role of the structure of trade (i.e. manufacturing vs. non-manufacturing) in the transmission process of shocks to the RER. Our evidence relates to findings of mitigating effects on sudden stops of trade openness (Cavallo and Frankel, 2008), and equity- rather than debt-related financial openness (Levchenko and Mauro, 2007; Calderón and Kubota, 2013).
format Journal Article
author Calderon, Cesar
Kubota, Megumi
author_facet Calderon, Cesar
Kubota, Megumi
author_sort Calderon, Cesar
title Does Higher Openness Cause More Real Exchange Rate Volatility?
title_short Does Higher Openness Cause More Real Exchange Rate Volatility?
title_full Does Higher Openness Cause More Real Exchange Rate Volatility?
title_fullStr Does Higher Openness Cause More Real Exchange Rate Volatility?
title_full_unstemmed Does Higher Openness Cause More Real Exchange Rate Volatility?
title_sort does higher openness cause more real exchange rate volatility?
publisher Elsevier
publishDate 2018
url http://hdl.handle.net/10986/29230
_version_ 1764468820970307584