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Does Exchange Rate Policy Matter for Growth?

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  • Jeannine Bailliu
  • Robert Lafrance
  • Jean-François Perrault

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.
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Suggested Citation

  • Jeannine Bailliu & Robert Lafrance & Jean-François Perrault, 2002. "Does Exchange Rate Policy Matter for Growth?," Staff Working Papers 02-17, Bank of Canada.
  • Handle: RePEc:bca:bocawp:02-17
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    More about this item

    Keywords

    Exchange rate regimes; Exchange rates; Monetary policy framework;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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