Structural Breaks in Volatility: Evidence from the OECD Real Exchange Rates

This paper analyses whether volatility changes in the real exchange rates (RERs) of the OECD industrial countries are associated with a specific nominal exchange rate regime. To that end, we examine RER behaviour during the period 1960-2003, thereby covering both the Bretton Woods system of fixed exchange rates and the adoption of generalised floating exchange rates from 1973. We make use of an econometric methodology based on Hansen’s (1997) approximation to the p-values of the supreme, exponential and average statistics developed by Andrews (1993) and Andrews and Ploberger (1994). This methodology allows us to obtain a profile of p-values and to delimit periods of stability and instability in the variance of real exchange rates. For most countries in our sample, there is evidence in favour of the non-neutrality of the nominal exchange rate regime regarding real exchange rate volatility.