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Open Economies Review

, Volume 19, Issue 2, pp 135–146 | Cite as

Openness and Real Exchange Rate Volatility: In Search of an Explanation

  • Michael Bleaney
Article

Abstract

The puzzle that real exchange rates are less volatile in open economies is an important challenge to exchange rate theory. Adjustment of domestic prices to nominal exchange rate movements can account for only a small proportion of this effect. Real and nominal shocks display no obvious correlation with openness. It is shown here that real effective exchange rates are more strongly mean-reverting in more open economies, even after controlling for exchange rate regime effects. This is predicted by the theory of current account sustainability, because of its emphasis on ratios to GDP rather than to trade flows.

Keywords

Openness Real exchange rate volatility 

JEL Classification

F31 F41 

Notes

Acknowledgement

The author wishes to thank Liliana Castilleja Vargas for excellent research assistance.

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.School of EconomicsUniversity of NottinghamNottinghamUK

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