REAL EXCHANGE RATE VARIABILITY : AN EMPIRICAL ANALYSIS OF THE DEVELOPING COUNTRIES CASE

다국어 초록 (Multilingual Abstract)

In this paper the relative importance of real and monetary factors in explaining recent real exchange rate, variability in developing countries have been investigated. The empirical evidence shows that in the last 15 years or so real exchange rate variability has increased significantly However, the degree of real exchange rate variability has been quite uneven across countries, with some countries experiencing variability almost ten times higher than others.
In theory, long-run equilibrium real exchange rates depend on the behavior of a number of real variables including the terms of trade and the degree of openness of the economy [Mussa (1984)]. In the shorter run, however, real exchange rate movements will also be affected by monetary disturbances, including the instability of the nominal monetary policy. From a policy point of view it is important to determine the extent to which actual real exchange rate variability stems from monetary and real disturbances. If nominal policy-induced instability has been an important cause of real exchange rate variability, some policy options may be open to reduce it.
In this paper data an a group of developing countries were used to investigate and assess the relative importance of monetary and real factors. The analysis focused both on long-wave and short-term variability The results, contrary to previous findings, indicate that real exchange rate variability has been caused both by monetary and real disturbances. with real variables being relatively more important in the explanation of long-wave instability and nominal variables playing a more prominent role in case of short-term instability.
In terms of real disturbances the most prominent has been external terms of trade variability, which was found to have played an important role in the determination of long-run real exchange rate instability. In the shorter run, however, it was found that no real variable had been important. Regarding monetary disturbances, this study indicates that nominal exchange rate instability has been the major and more persistent source of short-term real exchange rate instability in this group of countries.
From a policy perspective these results are important. They suggest that a stable nominal exchange rate policy will help to substantially reduce real exchange rate variability. There are a number of ways to reduce the degree of instability of the nominal exchange rate, including the adoption of any variant of crawling-peg systems. On the other hand, it is well known that nominal exchange rate instability is greatly enhanced by the adoption of a flexible rate system [Frenkel and Mussa (1982)]. To the extent that policymakers want to reduce real exchange rate variability, the result reported in this paper cautions them against adopting a floating rate system.