Soft Power and Exchange Rate Volatility

Standard models-based exclusively on macro-financial variables-have made little progress in explaining the behavior of exchange rates. In this paper, we introduce a neglected set of "soft power" factors capturing a country's demographic, institutional, political and social underpinnin...

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Main Author: Cevik, Serhan
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2015, 2015
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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520 |a Standard models-based exclusively on macro-financial variables-have made little progress in explaining the behavior of exchange rates. In this paper, we introduce a neglected set of "soft power" factors capturing a country's demographic, institutional, political and social underpinnings to uncover the "missing" determinants of exchange rate volatility over time and across countries. Based on a balanced panel dataset comprising 115 countries during the period 1996-2011, the empirical results are generally robust across different estimation methodologies and show a high degree of persistence in exchange rate volatility, especially in emerging market economies. After controlling for standard macroeconomic factors, we find that the "soft power" variables-such as an index of voice and accountability, life expectancy, educational attainment, the z-score of banks, and the share of agriculture relative to services-have a statistically significant influence on the level of exchange rate volatility across countries