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The Choice of Exchange Rate Regime: Does it affect Economic Growth - Research Paper Example

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The current paper is being carried out to look into the exchange rate regime as a factor of economic stability. Specifically, the researcher of this paper will attempt like to know if particular exchange rate regime affects the growth of an economy. …
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The Choice of Exchange Rate Regime: Does it affect Economic Growth
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The Choice of Exchange Rate Regime: Does it affect Economic Growth

Download file to see previous pages... From the research it is clear that in this globalized world, international trade becomes more efficient as technology further advances. The flow of the factors of production and exchange of goods and service are easier to be conducted. Buying goods and obtaining services from another country can be done by purchasing foreign currencies which is acceptable to the seller. Hence, the exchange rate of one currency to another is important in conducting global commerce. The exchange rate in the global economy is especially important since it serves as link between a country and the international community. It is well established in the literature that when improperly administered and supervised, the exchange rate can adversely affect the growth of an economy. Williamson explained, the prices within an economy have limited flexibility and thus, it is the nominal exchange rate that is being used to determine the real exchange rate which is one of the factors that determine economic stability. The two polar extremes that literature cites regarding the exchange rate systems are the floating and the fixed exchange rate which Williamson discussed well. In flexible or floating exchange rate the monetary and fiscal policy makers do not intervene in the determination of the nominal exchange rate as compared to the policy makers in an economy that adopts a fixed exchange rate. Fixed exchange rate system can be further classified into two: The hard pegs and the soft pegs. In hard peg system, a commitment to have a definite or fixed value of nominal exchange rate with respect to another is currency is for an indefinite future is given, while in soft peg, no long term commitment regarding the value of exchange rate to another currency is given. In soft pegs, periodic devaluations or increase of nominal exchange rate can occur or its counterpart, periodic revaluations. Prior to the late1990s, studies on the exchange rate regimes have been based on de jure classification or the one the type of exchange rate that countries declare to IMF that they use (Von Hagen and Zhou, 2009; Lovrinovic, Kordic, and Nakic, 2010; De Vita and Kyaw, 2012). However, as Von Hagen and Zhou (2009) have noted, the studies that followed afterwards reveal discrepancies of the country’s declared exchange rate system and the actions or interventions that they conduct regarding the subject. This made researchers explore the de facto classification also. It is therefore not a surprise that the study of the appropriate choice of exchange rate regime has captured a lot of attention from economists worldwide be they academicians or practitioners. But despite the numerous studies conducted, little consensus has been established so far and no conclusive answer have been reached yet (Huang and Malhotra, 2004; Lovrinovic et al., 2010; De Vita and Kyaw, 2012). Even empirical research has produced mixed results (De Vita and Kyaw, 2012). Having observed the above mentioned discrepancy between the declared exchange and the actions that governments make regarding it made the International Monetary Fund now use a classification that utilizes both the declared exchange rate systems of countries and the observations of the IMF officials on what these countries do (De Vita and Kyaw, 2012). The organization used the data available by April 2008 to classify exchange rate systems which they published in 2009. These classifications are as follows: Table 1 Current Exchange Rate Regimes in the World* Exchange Rate Regimes Number of Countries Percentage 1. Exchange arrangement with no separate 10 5.32 legal tender 2. Currency board arrangement 13 6.91 3. Other conventional fixed peg arrangement 68 36.17 4. Pegged exchange rate within horizontal bands 3 1.60 5. ...Download file to see next pagesRead More
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