Real Exchange Rate Volatility and Financial Integration: Evidence from Latin American Countries
DOI:
https://doi.org/10.47067/ramss.v3i3.81Keywords:
Financial Integration, Real Exchange Rate Volatility, Latin American CountriesAbstract
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.
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