The effect of the nominal exchange rate regime on real exchange rate variability

This paper examines the effect of the nominal exchange rate regime on real exchange variability, specifically testing the hypothesis that real exchange rates are more volatile under flexible than under fixed exchange rates. To avoid the problem of distinguishing between defacto and dejure exchange rate regimes, five quantitative measures of nominal exchange rate flexibility are used. The results show that the nominal exchange rate regime does matter, particularly for OECD countries, given the observed failure of purchasing power parity. However, the results also show that there are some missing variables that are bound to affect real exchange rate variability.