Exchange-rate regime and economic growth: a review of the theoretical and empirical literature

Marjan Petreski ()

No 2009-31, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The aim of this paper is to examine the theoretical and empirical arguments for the relationship between the exchange-rate regime and economic growth. As a nominal variable, the exchange rate (regime) might not affect the long-run economic growth. However, there is no unambiguous theoretical evidence what impacts the exchange-rate target exhibits on growth. The channel through which the regime might influence growth is trade, investment and productivity. Theoretical considerations relate the exchange-rate effect on growth to the level of uncertainty imposed by flexible option of the rate. However, while reduced policy uncertainty under a peg promotes an environment which is conductive to production factor growth, trade and hence to output, such targets do not provide an adjustment mechanism in times of shocks, thus stimulating protectionist behaviour, price distortion signals and therefore misallocation of resources in the economy. Consequently, the relationship remains blurred and requires in-depth empirical investigation. The empirical research offers divergent result though. A big part of the studies focuses on the parameter of the exchange-rate dummy, but does not appropriately control for other country-characteristics nor apply appropriate growth framework. Also, the issue of endogeneity is not treated at all or inappropriate instruments are repeatedly used. Very few studies disgracedly pay small attention to the capital controls, an issue closely related to the exchange-rate regime and only one study puts the issue in the context of monetary regimes. Overall, the empirical evidence is condemned because of growth-framework, endogeneity, sample-selection bias and the so-called peso problem. An empirical investigation which will consider all those aspects might reveal clear and robust suggestion of the relationship between exchange-rate regime and growth.

Keywords: Exchange rate regime; economic grow (search for similar items in EconPapers)
JEL-codes: E42 F31 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-dev, nep-fdg, nep-ifn, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://www.economics-ejournal.org/economics/discussionpapers/2009-31
https://www.econstor.eu/bitstream/10419/27729/1/604541589.PDF (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:200931

Access Statistics for this paper

More papers in Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().