Sources of exchange-rate volatility: Impulses or propagation?

This paper examines whether the remarkable increase in exchange-rate variability since the end of the Bretton Woods period has been the result of a less stable structure (the propagation mechanism) or more volatile shocks (the impulses). Using monthly data over the 1957:1 to 2000:12 period from the US, Canada, Germany, and the UK, our estimates of actual and counterfactual variances suggest that the increased volatility is entirely the result of more violent shocks, and not at all the consequence of a less stable structure. This result is robust to a number of different specifications examined.