Soft Power and Exchange Rate Volatility

By Serhan Cevik, Richard Harris, Fatih Yilmaz

March 20, 2015

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Format: Chicago

Serhan Cevik, Richard Harris, and Fatih Yilmaz. Soft Power and Exchange Rate Volatility, (USA: International Monetary Fund, 2015) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Standard models—based exclusively on macro-financial variables—have made little progress in explaining the behavior of exchange rates. In this paper, we introduce a neglected set of “soft power” factors capturing a country’s demographic, institutional, political and social underpinnings to uncover the “missing” determinants of exchange rate volatility over time and across countries. Based on a balanced panel dataset comprising 115 countries during the period 1996–2011, the empirical results are generally robust across different estimation methodologies and show a high degree of persistence in exchange rate volatility, especially in emerging market economies. After controlling for standard macroeconomic factors, we find that the “soft power” variables—such as an index of voice and accountability, life expectancy, educational attainment, the z-score of banks, and the share of agriculture relative to services—have a statistically significant influence on the level of exchange rate volatility across countries.

Subject: Econometric analysis, Education, Estimation techniques, Exchange rate arrangements, Exchange rate modelling, Exchange rates, Foreign exchange, Health

Keywords: Coefficient, Control variable, Copyright page, Estimation methodology, Estimation techniques, Exchange rate, Exchange rate arrangements, Exchange rate modelling, Exchange rate volatility, Exchange rates, Global, PCA control variables Assumed, Volatility remains, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/063
Stock No:

WPIEA2015063
ISBN:

9781475530520
ISSN:

1018-5941

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