Exchange Rate: Shock Generator or Shock Absorber?
AbstractThe paper re-assesses the impact of exchange rate regimes on macroeconomic performance. We test for the relationship between de jure and de facto exchange rate classifications on the one hand, and inflation, output growth and output volatility on the other. We find that, once high-inflation outliers are excluded from the sample, only hard exchange rate pegs are associated with lower inflation compared to the floating regime. There is no significant relationship between output growth and exchange rate regimes, confirming results from previous studies. De jure pegged regimes (broadly defined) are correlated with higher output volatility, but this relationship is reversed for the de facto classification. The last result points to a potential endogeneity problem present when the de facto classification is used in testing for the relationship between exchange rate behavior and macroeconomic performance.
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Bibliographic InfoPaper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0272.
Length: 33 Pages
Date of creation: 2004
Date of revision:
exchange rate regimes; inflation; output volatility;
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