Fix, Float, or Folly: A Contemporary Analysis of the Growth and Volatility Effects of Exchange Rate Regimes

Abstract

By extending analysis into the 21st century and across multiple currency regime classification systems, this paper attempts to bring historically opaque empirics on thegrowth effects of exchange rate regimes into a contemporary analysis. With a base sample from 1975 to 2014 across 100+ nations, I apply a time-fixed random effects model with clustered entity error to examine the effect exchange rate regimes have on growth and growth volatility. The model is consistent across results with R^2 values comparable to existing empirics. The results find that, compared to flexible regimes, fixed exchange rate regimes have no significant impact on growth except amongst industrial nations, where they are significantly and consistently associated with negative growth effects across all time periods in the sample. This negative growth association for industrial nations increases in both significance and magnitude in the period following the 2008 crisis. For non-industrial nations, only those with the most ridged exchange rate regimes are associated with negative growth, with significance from 2000-2010. There is weak evidence to suggest exchange rate regime effects growth volatility, though there is some significance among non-industrial nations. For these nations, fixed exchange rate regimes are significantly associated with decrease volatility compared to flexible regimes between 2000-2010. From 1975-1999, only non-industrial nations with highly inflexible pegs and those with managed floating regimes are associated with decreased growth volatility.