Effect of Financial Liberalization on Exchange Rate Volatilities in the Selected Developing Countries

The purpose of this paper is to evaluate the effect of financial liberalization on exchange rate volatilities of the selected developing countries, which are now known as liberalizing countries. Thus we test the hypothesis in which financial liberalization effect exchange rate volatilities in 43 selected developing countries during 1996-2005. Accordingly, a regression model of exchange rate volatility has been specified and estimated based upon employing fixed effects method. The results show that an index of capital control, which has been considered as a proxy of financial liberalization, has not affected exchange rate volatility indicating an ambiguous role of capital control in exchange rate volatilities, the implication is that appropriate and strategic financial liberalization can adjust volatilities of exchange rates in these countries.