In What Sense Can Intervention Reduce Exchange Rate Volatility?

Can pegging reduce real as well as nominal, and multilateral as well as bilateral exchange rate volatility? We investigate this issue using monthly data for 139 countries from January 1990 to June 2006. We use the IMF regime classification system, because this closely reflects the form of governments’ exchange rate commitments. We find that both nominal and real volatility against the anchor currency increase steadily with regime flexibility. Real bilateral volatility against non-anchor currencies and real effective exchange rate volatility are significantly higher under independent floats, but are otherwise insensitive to the exchange rate regime.