Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic GMM Panel Approach

36 Pages Posted: 30 Nov 2011

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Thouraya Hadj Amor

Economic Research Forum (ERF); University of Monastir - FSEGM

Christophe Rault

IZA Institute of Labor Economics; University of Orleans; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 29, 2011

Abstract

The aim of this paper is to provide some new empirical evidence on the determinants of volatility of real exchange rates in emerging countries, focusing on the role of international financial integration in particular. A reduced-form model is estimated using the GMM method for dynamic panels over the period 1979-2004 for a sample of 39 developing countries grouped into three regions (Latin America, Asia and MENA). Our findings suggest that different types of shocks (external, real and monetary) can account for volatility of real exchange rates in emerging economies, with international financial integration being a major driving force. Therefore, financial liberalization and integration should be pursued only gradually in emerging countries.

Keywords: emerging economies, real exchange rate, volatility, financial integration, GMM method, dynamic panel

JEL Classification: E310, F000, F310, C150

Suggested Citation

Caporale, Guglielmo Maria and Hadj Amor, Thouraya and Rault, Christophe and Rault, Christophe, Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic GMM Panel Approach (November 29, 2011). CESifo Working Paper Series No. 3645, Available at SSRN: https://ssrn.com/abstract=1965936 or http://dx.doi.org/10.2139/ssrn.1965936

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

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Berlin, 10117
Germany

Thouraya Hadj Amor

Economic Research Forum (ERF) ( email )

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(P.O. Box: 12311)
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Egypt

University of Monastir - FSEGM ( email )

Sidi Messaoud Hiboun
5111 Mahdia
Monastir, 4100
Tunisia

Christophe Rault (Contact Author)

University of Orleans ( email )

Rue de Blois
BP 6739
LEO, Orleans, Orleans cedex 2 45067
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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