Exchange-Rate Regime and Economic Growth: A Review of The Theoretical and Empirical Literature

Paper presented at a one-day international conference on International trade, Staffordshire University, Stoke-on-Trent, 05 December, 2008

18 Pages Posted: 30 Mar 2009

See all articles by Marjan Petreski

Marjan Petreski

University of American college - Skopje - School of Business Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 23, 2009

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 growth

JEL Classification: E42, F31

Suggested Citation

Petreski, Marjan, Exchange-Rate Regime and Economic Growth: A Review of The Theoretical and Empirical Literature (March 23, 2009). Paper presented at a one-day international conference on International trade, Staffordshire University, Stoke-on-Trent, 05 December, 2008, Available at SSRN: https://ssrn.com/abstract=1367104 or http://dx.doi.org/10.2139/ssrn.1367104

Marjan Petreski (Contact Author)

University of American college - Skopje - School of Business Economics and Management ( email )

Skopje, 1000
Macedonia

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