Exchange Rate Regimes and Economic Performance

Abstract

This paper studies the impact of exchange rate regimes on inflation, nominal money growth, real interest rates, and growth performance. We find that, for non-industrial economies, "long" pegs (defined as those lasting for five or more consecutive years) are associated with lower inflation than floats, but at the cost of an inferior growth performance. A similar tradeoff between inflation and growth is still present in the case of "hard" pegs (economies with currency boards or without separate legal tender), whose growth performance, as opposed to what is often suggested, does not differ significantly from that of conventional pegs. In contrast, "short" pegs clearly underperform floats, as they grow slower without providing any gains in terms of inflation.

Keywords: exchange rate regimes, growth, inflation, interest rates, hard pegs

JEL Classification: F31, F41, O47