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Does Exchange Rate Policy Matter for Growth?

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Author Info
Bailliu, Jeannine
Lafrance, Robert
Perrault, Jean-Francois

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Abstract

Previous studies on whether the nature of the exchange rate regime influences a country's medium-term growth performance have been based on a tripartite classification scheme that distinguishes between pegged, intermediate and flexible exchange rate regimes. This classification scheme, however, leads to a situation where two of the categories (intermediate and flexible) characterize solely the exchange rate regime, whereas the third (pegged) characterizes both the exchange rate regime and the monetary policy framework. Our study refines this classification scheme by accounting for different monetary policy frameworks, classifying monetary arrangements based on the presence of an explicit monetary policy "anchor", such as the exchange rate or other targeted nominal variable. We estimate the impact of exchange rate arrangements on growth in a panel-data set of 60 countries over the period 1973-1998. We find evidence that exchange rate regimes characterized by a monetary policy anchor, whether they are pegged, intermediate, or flexible, exert a positive influence on economic growth. We also find evidence that intermediate/flexible regimes without an anchor are detrimental for growth. Our results thus suggest that it is the presence of a monetary policy anchor, rather than the type of exchange rate regime per se, that is important for economic growth. Furthermore, our work emphasizes the importance of considering the monetary policy framework that accompanies the exchange rate arrangement when assessing the macroeconomic performance of alternative exchange rate regimes. Copyright 2003 by Blackwell Publishers Ltd.

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Article provided by Blackwell Publishing in its journal International Finance.

Volume (Year): 6 (2003)
Issue (Month): 3 (Winter)
Pages: 381-414
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Handle: RePEc:bla:intfin:v:6:y:2003:i:3:p:381-414

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Forssbaeck, Jens & Oxelheim, Lars, 2005. "On the Link between Exchange-Rate Regimes and Monetary-Policy Autonomy: The European Experience," Working Paper Series 637, Research Institute of Industrial Economics. [Downloadable!]
  2. Paul De Grauwe & Gunther Schnabl, 2004. "Exchange Rate Regimes and Macroeconomic Stability in Central and Eastern Europe," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  3. Hans Genberg & Alexander K. Swoboda, 2005. "Exchange Rate Regimes: Does What Countries Say Matter?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 52(si), pages 8. [Downloadable!] (restricted)
  4. Manuela Francisco & Michael Bleaney, 2003. "Exchange Rate Regimes and Monetary Discipline - Only Hard Pegs Make a Difference," NIPE Working Papers 6/2003, NIPE - Universidade do Minho. [Downloadable!]
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