Exchange rate volatility across financial crises

Abstract

n° 2010 – 08 april exchange rate flexibility across financial crises virginie coudert, cécile couharde and valérie mignon _____________ non-technical summary most currencies in the world are more or less linked to the dollar or the euro, even if very few of them have strictly fixed exchange rates. up to now, the use of the euro as an anchor currency has been confined to europe, its immediate vicinity and some african countries, leaving the rest of the world to the us dollar influence. the long-lasting prevalence of the us dollar as an anchor currency has however been more and more challenged for several years and some evolution has begun to take shape, especially since the start of the present financial crisis. many countries have loosened the link of their currency to the us dollar in the global financial crisis that started in july 2007, a fact that may be explained by relying on the literature on contagion across markets. spillovers from advanced financial markets to currencies in emerging countries stem from the same causes documented in the literature on contagion, such as the drying–up of investors’ liquidity, the rise in risk aversion, and the updating of their risk assessments. consequently, interdependencies across currencies are likely to be exacerbated during crisis periods. in this paper, we try to address these issues by answering the following questions: (i) have exchange rate policies been modified in the sense of a greater flexibility since the start of the …

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