Exchange Rate Regimes and Economic Growth in Central and Eastern European Countries

Abstract

One of the questions that have not received a clear answer by academics yet is if the exchange rate regime choice could influence the economic growth. The success of the stabilization programs based on exchange rates, the pegged exchange rate arrangements brake up in some emerging countries, the current difficulties in the Euro zone show why this topic is still controversial and important. We used OLS and GMM methods to estimate a growth model with dummy variables that isolate the effect of exchange rate regimes on economic growth. The research has been employed on 16 Central and Eastern European countries, where the exchange rate arrangement choice is a key point in the years before Euro adoption. We got statistically significant coefficients for the regime dummy variables, independently of the estimation method. Our results suggest superior effect on economic growth of the floating and intermediate regimes comparing to the fixed arrangements. Although the exchange rate stability is commonly viewed as stimulation for economic growth, it seems that it doesn’t support growth if it was obtained by massive interventions of the monetary authorities to support the exchange rate level. Our surprising result does not explain why a major part of the selected countries adopted hard pegs, although the flexible regimes apparently stimulate growth. It is possible that currency boards are not suitable for long periods of time, but just for a quick economic.