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

_IMF Working Papers, August 1, 1995_

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## Bibliographic details
- Authors: Gordon M. Bodnar, Leonardo Bartolini
- Published: August 1, 1995
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451850697.001

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### Study and Methods
- Objective: Re-examine whether exchange rates have been excessively volatile with respect to the predictions of the monetary model of the exchange rate and standard extensions (sticky prices, sluggish money adjustment, time-varying risk premia).
- Approach: Apply recent tests of asset price volatility (volatility-based tests) to exchange rates for the major currencies.
- Comparison: Results evaluated against previous regression-based tests.

### Data and Sample
- Currency coverage: Major currencies.
- Sample period: 1973 to 1994.

### Key Findings
- Model rejections:
  - "Most of the models that we examine are rejected by our volatility-based tests."
  - This result is "consistent with previous evidence from regression-based tests."
- Volatility conclusion:
  - "In general, however, we find that exchange rates have not been excessively volatile relative to movements of their determinants, with respect to the predictions of even the most restrictive version of the monetary model."
- Caveat on measures:
  - "Alternative measures of 'volatility', however, may disguise the cause of rejection as excessive exchange rate volatility."

### Interpretation and Implications
- Despite model rejections, the observed exchange rate variability is broadly in line with determinants implied by monetary-model predictions, including its most restrictive form.
- Rejection of models can arise from measurement or test-choice issues; different volatility measures can lead to attributing rejection to exchange rate excess volatility when the underlying cause may differ.

### Notes for Readers
- This is a Working Paper; the author(s) "would welcome any comments on the present text."
- Disclaimer: "The views expressed are those of the author(s) and do not necessarily represent those of the Fund."

*Source: IMF Working Papers — Are Exchange Rates Excessively Volatile? and What Does "Excessively Volatile" Mean, Anyway? by Gordon M. Bodnar and Leonardo Bartolini, August 1, 1995.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/are-exchange-rates-excessively-volatile-and-what-does-excessively-volatile-mean-anyway-1891_