Exchange Rate Volatility in Integrating Capital Markets

34 Pages Posted: 23 Apr 2004 Last revised: 5 Oct 2022

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

European University Institute; University of Cambridge; Centre for Economic Policy Research (CEPR)

Vittorio Grilli

Independent; National Bureau of Economic Research (NBER)

Nouriel Roubini

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1990

Abstract

This paper investigates the relationship between international capital liberalization and exchange rate volatility. While the effects of a capital controls liberalization on the transaction volume in the foreign exchange market are theoretically unambiguous, the effects on the volatility of exchange rate can have either sign. On one hand, the liberalization leads to increasing economy-wide and investor-specific uncertainty. On the other hand, the augiented number of participants in the market should reduce exchange rate fluctuations. The uncertainty effects should be dominant in the short run, while the increase in the number of traders in the longer run should make the market thicker and tend to reduce volatility. It is shown that, for a sample of countries which have liberalized capital controls in the last 15 years, structural breaks in the process generating exchange rate volatility have occurred very close to the time when liberalization measures were implemented. The results also suggest an increase in volatility after the structural breakpoint.

Suggested Citation

Corsetti, Giancarlo and Grilli, Vittorio and Roubini, Nouriel, Exchange Rate Volatility in Integrating Capital Markets (December 1990). NBER Working Paper No. w3570, Available at SSRN: https://ssrn.com/abstract=283341

Giancarlo Corsetti (Contact Author)

European University Institute ( email )

University of Cambridge ( email )

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Vittorio Grilli

Independent

Ministero del Tesoro
Direzione Generale del Tesoro Capo del Servizio I via XX Settembre 97

National Bureau of Economic Research (NBER)

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Nouriel Roubini

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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United States

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