Real Exchange Rate Volatility and Financial Integration: Evidence from Latin American Countries


  • Asma Awan Assistant Professor, Department of Economics, University of the Punjab, Lahore, Pakistan
  • Imran Sharif Chaudhry Dean, Faculty of Social Sciences, Director, School of Economics, Bahauddin Zakariya University, Multan, Pakistan
  • Furrukh Bashir Assistant Professor, School of Economics, Bahauddin Zakariya University, Multan , Pakistan
  • Rashid Ahmad Assistant Professor, School of Economics, Bahauddin Zakariya University, Multan , Pakistan



Financial Integration, Real Exchange Rate Volatility, Latin American Countries


This research is an endeavor to reveal the dynamic association of real exchange rate volatility with real and monetary shocks and particularly with international financial integration in selected eight Latin American countries during 1992-2018. The estimation strategy employed in this research is the Generalized Method of Moments (GMM) to empirically obtain consistent estimates. Empirical results strongly supported the significant negative impact of financial integration on real exchange rate volatility when financial integration is approximated by the Chinn-Ito index. Furthermore, output volatility and money supply volatility both significantly contributed to increasing real exchange rate instability. An important policy implication is that process of financial integration needs to be more strengthened and shocks to output and money supply needs to be reduced to achieve lesser fluctuations of the real exchange rate in Latin American countries.


Agenor, P.R. (2003). Benefits and Costs of International Financial Integration: Theory and Facts. World Economy, 26(8), 1089-1118.

Al-Abri, A. (2013). Real Exchange Rate Volatility, Terms of Trade, and Financial Integration in Primary Commodity Exporting Countries. Economic Letters, 120(1), 126-129.

Alberola, E. (2003). Real Convergence, External Disequilibria and Equilibrium Exchange Rates In EU Acceding Countries. Banco De Espana, Mimeo.

Arelleno M. & Bond, S. (1991). Some Tests of Specifications for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies, 58, 277-297.

Baldwin R. & Martin, P (1999). Two Waves of Globalization, Superficial Similarities and Fundamental Differences. NBER Working Paper 6904.

Bleaney, M. (2008). Openness and Real Exchange Rate Volatility: In Search of Explanation. Open Economic Review 19, pp. 135-46.

Calderon, C. & Kubora, M. (2018). Does Higher Openness Cause Real exchange Rate Volatility?. Journal of International Economics, 110, 176-204

Calderon, C. (2003). What Derives Volatility in Real Exchange Rates? Evidence from Industrial Countries. Central Bank of Chile. Mimeo.

Calderon, C. (2004). Real Exchange Rates in Long and Short Run: A Panel Co-integration Approach. ILADES Georgetown, Review of Economic Analysis, 19(2), 40-83.

Calderson, C. (2004). Trade Openness and Real Exchange Rate Volatility: Panel Data Evidence. Central Bank of Chile, Working Paper 294.

Caporal M. G., Amor H T. & Rault C. (2009). Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic Panel Data Approach. Economics and Finance Working Papers, Brunel University West London.

Carrera, J. & Guillermo V. (2002). The Effects of Exchange Rate Regimes on Real exchange Rate Volatility: A Dynamic Panel Data Approach. Discussion Papers.

Chinn, M. & Ito, Hiro. (2006). What Matters for Financial development? Capital Controls, Institutions and Interactions.. Journal of Development Economics, 81 (1),163-192.

Chinn, M. & Ito, Hiro. (2008). A New Measure of Financial Openness. Journal of Comparative Policy Analysis, Vol. 10, Issue 3, pp. 309-322.

Dell’ Ariccia, G. (1999). Exchange Rate Fluctuations and Trade Flows: Evidence from European Union. IMF Staff Papers 46(3).

Devereux, Michael B. & Philip, R, Lane (2003). Understanding Bilateral Exchange Rate Volatility. Journal of International Economics, 60:109-32.

Dornbusch, R. & Stanley F. (1980). Exchange Rate and the Current Account. American Economic Review 70, 960-71.

Duarte, Antonia P., Joao S. A. and Adelaide D. (2008). Exchange Rate and International Rate Volatility in Target Zone: The Portuguese Case. Working Paper No. 3

Edwards, S. (1998). Real Exchange Rate in Developing Countries: Concepts and Measurements. NBER Working Paper No 2950.

Egert, B. Lahreche – Revil, A. and Lommatzsch, K. (2004). The stock Flow Approach to the Real Exchange Rate of CEE Transition Economies. CEPII, Working Paper No 15, 4-28.

Faruqee, H. (1995). Long Run Determinants of the Real Exchange Rate: A Stock Flow Perspective. IMF Staff Papers, 42(1), 80-107.

Fischer, S. (1998). Capital Account Liberalization and Role of IMF” in “Should the IMF Pursue Capital Account Convertibility?. Essays in International Finance, Department of Economics, Princeton University, 207, 1-10.

Frankel, J.A & Rose A.K (1996). Currency Crashes in Emerging Markets: An Empirical Treatment. Journal of International Economics, vol. 41, pp. 351-366.

Frankel, J.A (1999). No Simple Currency Regime is Right for all Countries at All Times. NBER Working Paper 7338.

Friedman, M. (1953. The Case of Flexible Exchange Rates. Essays in Positive Economics, University of Chicago Press.

Gagnon, J. (1993). Exchange Rate Variability and Level of International Trade. Journal of International Economics, No. 34, 269-287.

Gavin, M. (1992). Monetary Policy, Exchange Rates and Investment in Keynesian Economy. Journal of International Monetary and Finance, 11, 145-161.

Goldstein, M. & Turneip (2004). Controlling Currency Mismatches in Emerging Markets. International Economic Review.

Hau, H. (2002). Real Exchange Rate Volatility and Economic Openness: Theory and Evidence. Journal of Money, Credit and Banking, 4, 611-30.

Hooper, P. & J. Marton. (1982). Fluctuations in Dollar: A Model of Nominal and Real Exchange Rate Determination. Journal of International Money and Finance,1, 39-56.

Jongwanich, J. (2006). Exchange Rate Regimes, Capital Account Opening and Real Exchange Rates Evidence from Thailand. Economics RSPAS, ANU.

Kpodar, K (2007). Manuel d’ initiation a Stata. CERDI, CNRS, Janvier, 5-77.

Lane, P. R & Milesi – Ferretti G. M (2005). Financial Globalization and Exchange Rates. IMF Working Paper 03, 4-25.

Le Fort, G. (2000). The Chilean Experience in Capital Account Regulations. Conference on Developing Countries and the Global Financial Architecture, Lancaster House, London.

Morana, Claudie (2009). On the Macroeconomic Causes of Exchange Rate Volatility. International Journal of Forecasting, 25, 328-50.

Morrison, A.D & white, L. (2004). Financial Globalization and Capital Regulations in Open Economies. Oxford Financial Research Centre Working Paper No. 2004-FE-10.

Mussa M. & Goldstein M. (1993). The Integrated World Capital Markets. Proceedings Federal Reserve Bank of Konsas City, pp. 245-330.

Nor, I. M. Masron, A. & Yousif Alabdullah, T. (2020). Macroeconomic Fundamentals and Exchange Rate Volatility: Empirical Evidence from Somalia. SAGE Open, 1-12.

Obstfeld, M. & Rogoff K.S (1995). Exchange Rate Dynamics Redox.. Journal of Political Economy, 103 (3), 624-660.

Obstfeld, M. (1998). The Global Capital Market: Benefactor or Menace?. Journal of Economic Perspectives, 12 (4), 9-30.

Quinn, D. (1997). The Correlation of Changes in International Finance Regulations. American Political Science Review.

Quinn, D. (2003). Capital Account Liberalization and Financial Globalization 1890-1999: A Synoptic view. International Journal of Finance and Economics, 8 (3)

Rahn, J. (2003). Bilateral Equilibrium Exchange Rates of the EU Accession Countries against the Euro. BOFIT Discussion Paper No. 11

Reinhart, Carmen M. & Todd Smith R, (2001). Temporary Controls on Capital Inflows. NBER Working Papers 8422.

Stancik, J. (2006). Determinants of Exchange Rate Volatility: The Case of New EU Members. Centre for Economic Research and Graduate Education – Economic Institute, Discussion Paper 158.

Stiglitz, J. E (2002). Globalization and Its Discontents. New York: Norton.

Thursby, J.G & M.C Thursby (1987). Bilateral Trade Flows, the Linder Hypothesis and Exchange Rate Risk. Review of Economics and Statistics, 69, 488-95.

Vo, V. (2005). Determinants of International Financial Integration. University of New South Wales – NSW 2052 Australia.




How to Cite

Awan, A. ., Chaudhry, I. S. ., Bashir, F. ., & Ahmad , R. . (2020). Real Exchange Rate Volatility and Financial Integration: Evidence from Latin American Countries. Review of Applied Management and Social Sciences, 3(3), 445-458.

Most read articles by the same author(s)

1 2 > >>