Does Regime Choice Affect Exchange Rate Volatility-Economic Growth Link? An Application of Panel-VAR Approach

Abstract

ABSTRACTIn recent years, numerous studies demonstrated that the effect of exchange rate regimes on economic growth is influenced by several factors. However, the literature rarely takes into account the possible costs associated with improving institutional quality on the choice of exchange systems and the analysis of the effects of shocks in the case of each type of regime. Throughout this research, we analyze the extent of bidirectional shocks according to each regime and compare the shock effects accordingly. The results show that the real exchange rate is less volatile and the shock effect is lower in countries that adopt a fixed exchange rate regime while the exchange rate is more volatile and the shock is higher in countries that adopt a flexible exchange rate regime. To show the effect and persistence of shocks, we carried out a Panel-VAR regression completed by impulse response functions, VAR decomposition and Granger causality tests for 20 countries adopting the first type of exchange regime compared with 20 countries practicing an alternative exchange rate regime in the period from 1996 to 2012.