Non-Fundamental Exchange Rate Volatility and Welfare

53 Pages Posted: 23 Jun 2004

See all articles by Roland Straub

Roland Straub

European Central Bank (ECB)

Ivan Tchakarov

International Monetary Fund (IMF) - Asia and Pacific Department

Date Written: April 2004

Abstract

We lay out an empirical and a theoretical model to analyze the effects of non-fundamental exchange rate volatility on economic activity and welfare. In the first part of the paper, the GARCH-SVAR model is applied to measure empirically the effect of the conditional exogenous exchange rate volatility on the conditional mean of the endogenous variables in our open economy VAR. Our results for Canada, Germany and UK indicate that the effects of exchange rate uncertainty are small empirically. In the second part, we investigate the effect of non-fundamental exchange rate volatility in a stochastic open economy model. The second order approximation method of Sims [2003] is applied to the model equilibrium conditions. We show that in a model with habit persistence, even non-fundamental exchange rate volatility that generate only small variation in the unconditional mean of the variables might induce economically significant welfare changes.

Keywords: GARCH-SVAR, Exchange rate volatility, Second-order approximation, Welfare

JEL Classification: C32, F31, F41

Suggested Citation

Straub, Roland and Tchakarov, Ivan, Non-Fundamental Exchange Rate Volatility and Welfare (April 2004). Available at SSRN: https://ssrn.com/abstract=526991 or http://dx.doi.org/10.2139/ssrn.526991

Roland Straub (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ivan Tchakarov

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
182
Abstract Views
1,554
Rank
336,829
PlumX Metrics