Economics, Econometrics and Finance
4 years ago

Exchange rate volatility favors appreciation, impacting central bank policies.

SSRN Electronic Journal
Free Float and Stochastic Volatility: The Experience of a Small Open Economy
Faruk Selçuk

Paper Summary

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Turkey switched to a free-floating exchange rate system in 2001 after a fixed rate program failed. A study on Turkey's exchange rate found that when the rate goes up, its volatility also increases. However, when the rate drops, the volatility decreases less. This means that a central bank trying to stabilize the exchange rate might unintentionally favor rate appreciation.