Comparisons of Real Exchange Rate Volatility Across Exchange Rate Systems

Published comparisons of real exchange rate volatility have concentrated on the dispersion of monthly or quarterly movements. If volatility is to be a measure of the potential for misalignment, account must also be taken of the persistence of such movements. A simple measure of long-run volatility that captures persistence effects is used to compare the real exchange rate volatility of bilateral rates against the Deutschmark within and outside the European Monetary System. Volatility is much greater outside the European Monetary System on short-run measures but the difference is less marked in longer-run measures, particularly for European countries.