3.1. Descriptive statistics
Fig. 1a and b shows the distribution of effective short term exchange rate volatility21 for each of the years between 2000 and 2009 and then for each currency across years.22 As monthly exchange rate data is not always available the volatility variable is calculated only for 68 countries. Overall volatility bottomed during the period of 2004–2006 to sharply increase at the onset of the financial crisis. In just a few months at the end of 2008 some currencies oscillated 20 percent or more in relation to the major reserve currencies.
Fig. 1b shows that volatility is not a common problem to all currencies, but tends to be concentrated in about half of the currencies in the sample. That is, while about half of currencies are more or less aligned with those of their trading partners (say, because of managed or pegged exchange rates), the other half fluctuates more widely. Currency fluctuation may be detrimental to international trade as it increases the risk of cross border transactions. In regard to currency misalignments,