Measuring and Analyzing the Effects of Short-Term Volatility in Real Exchange Rates

Abstract

This paper examines short-term volatility in the real effective exchange rates of industrial countries and its impact on their imports. It yields three conclusions. First, volatility has not diminished as markets have gained experience with floating exchange rates; the trend appears to be in the opposite direction for some countries. Second, exposure to short-term volatility has differed among countries; Japan and Sweden have experienced much more than most other industrial countries. Third, volatility appears to depress the volume of international trade. This third finding is consistent with results reported by Cushman and by Akhtar and Hilton and challenges earlier findings by Hooper and Kohlhagen.