Do fixers perform worse than non-fixers during global recessions and recoveries?

Abstract

There is an important debate about how economies with different exchange rate regimes performed during the Great Recession and its ensuing recovery. While economic theory suggests that economies with fixed exchange rates are more affected and recover more slowly from global shocks than economies with non-fixed exchange rates, the empirical evidence on the most recent global recession has been mixed. This paper uses dynamic panel models to examine how the exchange rate and economic growth nexus is affected by the four global recessions and recoveries the world economy has experienced post-Bretton Woods. While there is no robust long-term relationship between exchange rate regimes and growth, there is evidence that fixers recover from global recessions at a weaker pace than non-fixers. These findings are robust across the different de facto exchange rate regime measures.