Exchange Rate Flexibility, Financial Market Openness, and Economic Growth*

Il Houng Lee and Kyunghun Kim
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Il Houng Lee: Monetary Policy Board Bank of Korea (BOK) 39, Namdaemun-ro, Jung-gu, Seoul 04531, Korea Author email: ilhoung@bok.or.kr
Kyunghun Kim: Korea Institute for International Economic Policy (KIEP) Building C, Sejong National Research Complex 370 Sicheongdaero, Sejong-si 30147, Korea Author email: khkim@kiep.go.kr

Asian Economic Papers, 2018, vol. 17, issue 1, 145-162

Abstract: We investigate the effect of exchange rate flexibility on economic growth. We find that exchange rate flexibility negatively affects economic growth, but this effect varies with the degree of financial market openness. Countries with high financial market openness benefit from maintaining high exchange rate flexibility, whereas the opposite is true for countries with low financial market openness. This empirical result implies that policymakers should consider the long-term growth effect when formulating exchange rate policy as it could be a useful policy option for emerging markets with limited policy independence. This is particularly relevant to policy coordination since greater exchange rate flexibility alone cannot solve the global imbalance.

Date: 2018
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