Are Exchange Rates Excessively Volatile? And What Does "Excessively Volatile" Mean, Anyway?

IMF Staff Papers
Vol. 43, 1996

Leonardo Bartolini
International Monetary Fund

Gordon M. Bodnar
Wharton School, University of Pennsylvania

Abstract

We apply recent asset price volatility tests to re-examine whether exchange rates have been "excessively" volatile over the post-Bretton Woods period relative to the predictions of the monetary model of the exchange rate and of standard extensions with sticky prices, sluggish money adjustment, and risk premiums. Our tests reject most of the models that we examine. In general, however, we find that exchange rates have not been excessively volatile, relative to the predictions of even the most restrictive versions of the model. Alternative measures of volatility; however, any disguise the cause of rejection as excessive exchange rate volatility.