Exchange Rate Regimes and Economic Performance

SSRN Electronic Journal, 2000

implications of these channels in terms of long-run growth performance are not obvious, there is some evidence of a negative link between output volatility and growth. 4 On the other hand, by reducing relative price volatility, a peg is likely to stimulate investment and trade, thus increasing growth. 5 Lower price uncertainty, usually associated with fixed exchange rate regimes, should also lead to lower real interest rates, adding to the same effect. Moreover, (credible) fixed exchange rate regimes are usually assumed to contribute to monetary policy discipline and predictability, and to reduce a country's vulnerability to speculative exchange rate fluctuations, all factors that are conducive to stronger growth performance. 6

2014

This Working Paper should not be reported as representing views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will tend over time to move to the polar extremes of free float or rigid peg. Rather, intermediate regimes have shown remarkable durability. The analysis suggests that as economies mature, the value of exchange rate flexibility rises. For countries at a relatively early stage of financial development and integration, fixed or relatively rigid regimes appear to offer some anti-inflation credibility gain without compromising growth objectives. As countries develop economically and institutionally, there appear to be considerable benefits to more flexible regimes. For developed countries that are not in a currency union, relatively flexible exchange rate regimes appear to offer higher growth without any cost in credibility.

IMF Working Papers, 2003

This Working Paper should not be reported as representing views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will tend over time to move to the polar extremes of free float or rigid peg. Rather, intermediate regimes have shown remarkable durability. The analysis suggests that as economies mature, the value of exchange rate flexibility rises. For countries at a relatively early stage of financial development and integration, fixed or relatively rigid regimes appear to offer some anti-inflation credibility gain without compromising growth objectives. As countries develop economically and institutionally, there appear to be considerable benefits to more flexible regimes. For developed countries that are not in a currency union, relatively flexible exchange rate regimes appear to offer higher growth without any cost in credibility.

Journal of Money, Credit and Banking, 2008

This paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime. We confirm empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises, the cost of which increases with the duration of the peg before the crisis. We explain these observations in a framework in which the exchange rate peg is used as a commitment mechanism to achieve inflation stability, but multiple equilibria are possible. We show that there are ex ante large gains from choosing a more conservative not only in order to mitigate the inflation bias from the well-known time inconsistency problem, but also to steer the economy away from the high inflation equilibria. These gains, however, come at a cost in the form of the monetary authority's lesser responsiveness to output shocks. In these circumstances, using a pegged exchange rate as an anti-inflation commitment device can create a "trap" whereby the regime initially confers gains in anti-inflation credibility, but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy. We also show that the more conservative is the regime in place and the larger is the cost of regime change, the longer will be the average spell of the fixed exchange rate regime, and the greater the output contraction at the time of a regime change.

American Economic Review, 2003

We study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post-Bretton Woods period , using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables. In contrast with previous studies, we find that, for developing countries, less flexible exchange rate regimes are associated with slower growth, as well as with greater output volatility. For industrial countries, regimes do not appear to have any significant impact on growth. The results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature.

This paper conducts a comprehensive empirical analysis to examine the stability of the overall system of exchange rates along two dimensions: does the choice of exchange rate regime help individual countries achieve their domestic macroeconomic goals? And does this choice of regime facilitate the country's interaction with the rest of the system? The empirical findings suggest that there is no universally "right" regime—pegged and intermediate regimes are associated with low nominal volatility and higher economic growth, especially for emerging market economies, and with deeper trade integration, which is growth enhancing. However, floating regimes imply a smoother external adjustment and lower susceptibility to financial crises. Individual countries should therefore tailor the choice of exchange rate regime according to their particular economic challenges, with the proviso that those opting for less flexible regimes should ensure strong macroeconomic fundamentals to ...

Journal of Environmental Science and Economics, 2022

This study provides a comprehensive currencies history of the exchange rate arrangement of 195 countries; exchange rate regime impacts on countries growth and macroeconomic stability period of 1961 to 2020. New measurements of foreign exchange regimes and under controlling the income level of high, upper-middle, middle, and lower-middle economies; This Study adopt Generalized Method of Movements (GMM) to investigate the impact of exchange rate regimes on the economies and macroeconomic stability through Per Capita GDP, GDP growth, Inflation and Foreign Trade. The U.S. Dollar dominated currency in world with a high margin. World countries desire to stabilize exchange rates, reduce exchange restrictions and currencies influence. We find that post Bretton woods transition from fixed to flexible management: Strong relations exist among the choice of exchange rate regime and countries growth. Policy implications are clear; the choice of exchange rate arrangement prevails no impact showing on the long-term countries growth, exchange rate anchor currencies of US Dollar, British Sterling Pound, Euro, Chinese Yuan, French franc, Deutschmark, and Basket currencies have a highly significant impact on countries growth of different income level. Suggest Chinese Yuan may consider alternate anchor currency for World and new measure of exchange rate controls developed. Central banks may be secure advanced country bonds, safe assets, and multi-currencies pegged systems adopted for the reserve to overcome the declining effectiveness of exchange controls.

2000

The purpose of this article is to explain the decrease in the fixed exchange rate regimes we have experienced the last decades. Our econometric approach is duration analysis, and the explanatory variables used are taken from the literature on optimum currency areas. The sample consists of 51 countries and covers the period 1973-1995. The degree of openness proves to be the most influential variable. Increasing openness by 1% decreases the hazard for adopting a floating exchange rate by 1.29%, i.e. an elasticiy of -1.29. The size of a country and the inflationary differential against foreign countries are also significant. But the corresponding elasticities (0.19 and 0.25) are considerably lower than for openness.

2005

We thank Jessica Wesley for research assistance. The views presented in this paper are those of the authors alone and do not necessarily reflect those of the NBER, the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.