Open Economies Review

, Volume 23, Issue 1, pp 193–211 | Cite as

IMF Support and Inter-Regime Exchange Rate Volatility

  • Ivo J. M. Arnold
  • Ronald MacDonald
  • Casper G. de Vries
Research Article
  • 135 Downloads

Abstract

It is widely agreed that when moving from fixed to floating exchange rates the increase in exchange rate volatility is not matched by an equivalent rise in the volatility of fundamentals. We argue and demonstrate that in inter-regime comparisons one has to account for ‘missing variables’ that compensate for the fundamental variables’ volatility under fixed exchange rates. Previous studies have often used foreign exchange reserves, but without much success. We argue why reserves are not a reliable measure, while IMF credit support is. Our empirical analysis identifies IMF support as a crucial and significant compensating variable.

Keywords

Exchange rates Exchange rate regimes Excess volatility IMF credit 

JEL classification

F31 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Ivo J. M. Arnold
    • 1
  • Ronald MacDonald
    • 2
  • Casper G. de Vries
    • 3
  1. 1.Universiteit NyenrodeBreukelenThe Netherlands
  2. 2.Department of EconomicsUniversity of GlasgowGlasgowUnited Kingdom
  3. 3.Erasmus University Rotterdam and Tinbergen InstituteRotterdamThe Netherlands

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