Abstract
This paper shows that the real exchange rate (RER) is more volatile in emerging markets (EM) than in advanced economies (AE). This stylized fact is well explained by the correlation coefficient between gross capital inflows (increases in liabilities with the rest of the world) and gross capital outflows (increases in assets held by domestic agents in the rest of the world). This correlation (with increases both in foreign liabilities and assets expressed as positive magnitudes) has averaged over 0.80 since 2000 in AE but has oscillated between less than 0.10 and 0.40 in EM. With the use of an empirical model, we find a negative relationship between the correlation coefficient of gross inflows and outflows, on the one hand, and real exchange volatility, on the other. This finding is robust to various estimation procedures.
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