Melecky, Martin2012-05-252012-05-252008-01https://hdl.handle.net/10986/6452This paper proposes a measure of synchronization in the movements of relevant domestic and foreign fundamentals for choosing suitable currency for denomination of foreign debt. The selection of explanatory variables for exchange rate volatility is motivated using a New Keynesian Policy model. The model predicts that not only traditional optimal currency area variables, but also variables considered by the literature on currency preferences, such as money velocity, should be relevant for explaining exchange rate volatility. The findings show that measures of inflation synchronization, money velocity synchronization, and interest rate synchronization can be useful indicators for decisions on the currency denomination of foreign debt.CC BY 3.0 IGOBALANCE SHEETBALANCE SHEETSBANK POLICYBENCHMARKBILATERAL EXCHANGE RATEBORROWING COSTBORROWING STRATEGIESBUSINESS CYCLESCAPITAL CONTROLSCENTRAL BANKCLOSED ECONOMYCONTRIBUTIONCREDIBILITYCURRENCYCURRENCY COMPOSITIONCURRENCY CRISESCURRENCY DENOMINATIONCURRENCY EXPOSURESCURRENCY MISMATCHESCURRENCY SUBSTITUTIONCURRENCY VALUECURRENCY VALUESDATA AVAILABILITYDEBT DENOMINATIONDEBT MANAGEMENTDEBT-SERVICEDEMAND FOR MONEYDEPENDENT VARIABLEDEPRECIATIONDERIVATIVEDERIVATIVESDEVELOPING COUNTRIESDEVELOPING COUNTRYDEVELOPMENT ECONOMICSDEVELOPMENT OF BOND MARKETSDOMESTIC BONDDOMESTIC BOND MARKETSDOMESTIC CURRENCYDOMESTIC ECONOMYDOMESTIC INTEREST RATEDOMESTIC MARKETSDOMESTIC PRICEDOMESTIC PRICE LEVELECONOMETRIC ANALYSISECONOMIC ACTIVITYEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET ECONOMIESEQUILIBRIUMERROR TERMEXCHANGE MARKETEXCHANGE RATEEXCHANGE RATE MANAGEMENTEXCHANGE RATE MOVEMENTSEXCHANGE RATE REGIMESEXCHANGE RATE RISKEXCHANGE RATE VARIABILITYEXCHANGE RATE VOLATILITYEXCHANGE RATESEXPENDITUREEXPLANATORY VARIABLESEXPOSUREEXPOSURESEXTERNAL BALANCESEXTERNAL SHOCKSFINANCIAL INTEGRATIONFOREIGN CURRENCIESFOREIGN CURRENCYFOREIGN CURRENCY DEBTFOREIGN DEBTFOREIGN EXCHANGEFOREIGN EXCHANGE DEBTFOREIGN EXCHANGE MARKETSFOREIGN EXCHANGE RESERVESFOREIGN EXCHANGE RISKFOREIGN INTERESTFOREIGN INTEREST RATEFUNCTIONAL FORMSFUNDAMENTAL DETERMINANTSGDPGOVERNMENT BORROWINGGOVERNMENT BUDGETGOVERNMENT DEBTGOVERNMENT REVENUESGROWTH RATESHARD CURRENCYHEDGESHIGH-INCOME COUNTRIESINCOMEINDIVIDUAL CURRENCIESINFLATIONINSTRUMENTINTEREST RATEINTEREST RATE RISKINTEREST RATE VOLATILITYINTEREST RATESINTERNATIONAL BANKINTERNATIONAL CURRENCYINTERNATIONAL ECONOMICSINTERNATIONAL FINANCIAL STATISTICINTERNATIONAL MONEYLEVEL OF RISKLEVERAGELIABILITYLIABILITY MANAGEMENTLOCAL CURRENCYLONG-TERM COSTSLOW-INCOMELOW-INCOME COUNTRIESM2MAJOR CURRENCIESMARGINAL UTILITYMARKET INTERESTMARKET INTEREST RATEMARKET INTEREST RATESMARKET PRESSUREMIDDLE-INCOME COUNTRIESMONETARY AGGREGATEMONETARY AUTHORITYMONETARY POLICYMONEY DEMANDMONEY DEMAND INCREASESMONEY MARKETMONEY SUPPLYNOMINAL EXCHANGE RATESNOMINAL INTEREST RATEOIL REVENUESOPTIMAL ALLOCATIONOPTIMIZATIONOPTIMUM CURRENCY AREAOPTIMUM CURRENCY AREASOUTPUTOUTPUT GAPPANEL DATA ESTIMATIONPEGPHILLIPS CURVEPOLITICAL ECONOMYPORTFOLIOPORTFOLIOSPRESENT VALUEPUBLIC DEBTPUBLIC DEBT MANAGEMENTPUBLIC DEBT MANAGERSRANDOM VARIABLESREAL INTERESTREAL INTEREST RATEREFERENCE CURRENCIESREGRESSION ANALYSISRELATIVE PRICERESERVESRETURNRISK MANAGEMENTSHORT-TERM INTEREST RATESSOVEREIGN DEBTSTANDARD DEVIATIONSTANDARD DEVIATIONSSTEADY STATESTOCKSSTRUCTURAL SHOCKSSUPPLY SIDETAXTERM STRUCTURE OF INTEREST RATESTRANSACTIONS COSTSTRANSMISSION MECHANISMSUNCERTAINTYUSE OF DERIVATIVESWEIGHTSZERO WEIGHTSWorld Bank10.1596/1813-9450-4458