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Exchange Rate Flexibility, Financial Market Openness, and Economic Growth

Author

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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)

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.

Suggested Citation

  • Il Houng Lee & Kyunghun Kim, 2018. "Exchange Rate Flexibility, Financial Market Openness, and Economic Growth," Asian Economic Papers, MIT Press, vol. 17(1), pages 145-162, Winter/Sp.
    • Handle: RePEc:tpr:asiaec:v:17:y:2018:i:1:p:145-162
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    Cited by:

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    2. Mohamed Ariff & Alireza Zarei, 2018. "Sustainable Development and Currency Exchange Rate Behavior," Asian Economic Papers, MIT Press, vol. 17(3), pages 148-173, Fall.
    3. Thi Bich Ngoc Tran & Hoang Cam Huong Pham, 2020. "The Spillover Effects of the US Unconventional Monetary Policy: New Evidence from Asian Developing Countries," JRFM, MDPI, vol. 13(8), pages 1-26, July.

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