Economic impact of trade openness and exchange rate regimes: evidence from developing Asia

With rapid globalisation, examining the economic impact of exchange rate flexibility as well as its volatility becomes imperative. In this context, our paper examines whether a country's degree of openness matters in choosing how flexible an exchange rate system should be if the objective is to improve per capita GDP or its growth. Based on a sample data set for 18 Asian countries, our econometric results (based on 2SLS, fixed effect estimation model, covering the period since 1961) indicate that both trade openness and exchange rate flexibility (de facto) impact GDP favourably. However, significant and robust evidence also shows that for more open economies, greater flexibility of de facto exchange rates is not desirable. Results also indicate that the economic impact of volatility is rather weak, though where significant, remains positive. Further, as expected, the economic impact of greater volatility is negative for Asian countries that are more open.