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:	REAL EXCHANGE RATE VOLATILITY FINANCIAL OPENNESS CAPITAL FLOWS TRADE OPENNESS TRADE POLICY TRADE LIBERALIZATION EXCHANGE RATES STRUCTURE OF TRADE DEBT EQUITY FLOWS
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

Does Higher Openness Cause More Real Exchange Rate Volatility?

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