The cost of crises and learning to live with exchange rate volatility: evidence from survey measures of consumer and business expectations

Abstract

Conclusion: This paper has assessed the empirical relationship between exchange rate volatility and survey measures of household and business confidence in Australia, Japan, Korea, Malaysia, and Singapore. Caution needs to be used in interpreting this relationship, because the number of countries and observations is relatively small and because volatility may be a proxy for the effects of other factors and shocks on sentiment. But some tentative conclusions can be drawn. Business sentiment is more sensitive than consumer sentiment to exchange rate volatility. Exchange rate volatility matters much more when there is a currency crisis than in ‘normal’ times: it seems that currency crises are much more damaging to confidence than is exchange rate volatility itself. Finally, there is some evidence that consumers and firms learn to live with exchange rate uncertainty in flexible rate regimes. Show more