This paper analyzes the growth and stabilization experience in 26 transition economies in eastern Europe, the former Soviet Union, and Mongolia for the period 1989-1994. Inflation rates have declined significantly in most countries following an inflation stabilization program. Growth resumes after stabilization occurs, typically with a lag of about two years. Reducing inflation thus appears to be a precondition for growth. An econometric analysis of the short-run determinants of inflation and growth illustrates the key roles of fixed exchange rates, improved fiscal balances, and structural reforms in spurring growth and lowering inflation, and confirms that inflation stabilization programs have been beneficial for growth even after controlling for structural reforms.

Stabilization and Growth in Transition Economies; The Early Experience

The aim of this paper is to examine the theoretical and empirical arguments for the relationship between the exchange-rate regime and economic growth. As a nominal variable, the exchange rate (regime) might not affect the long-run economic growth. However, there is no unambiguous theoretical evidence what impacts the exchangerate target exhibits on growth. The channel through which the regime might influence growth is trade, investment and productivity. Theoretical considerations relate the exchange-rate effect on growth to the level of uncertainty imposed by flexible option of the rate. However, while reduced policy uncertainty under a peg promotes an environment which is conductive to production factor growth, trade and hence to output, such targets do not provide an adjustment mechanism in times of shocks, thus stimulating protectionist behaviour, price distortion signals and therefore misallocation of resources in the economy. Consequently, the relationship remains blurred and requires in-depth empirical investigation. The empirical research offers divergent result though. A big part of the studies focuses on the parameter of the exchange-rate dummy, but does not appropriately control for other country-characteristics nor apply appropriate growth framework. Also, the issue of endogeneity is not treated at all or inappropriate instruments are repeatedly used. Very few studies disgracedly pay small attention to the capital controls, an issue closely related to the exchange-rate regime and only one study puts the issue in the context of monetary regimes. Overall, the empirical evidence is condemned because of growth-framework, endogeneity, sample-selection bias and the so-called peso problem. An empirical investigation which will consider all those aspects might reveal clear and robust suggestion of the relationship between exchange-rate regime and growth.

/pdf/exchange-rate-regime-and-economic-growth-a-review-of-the-364vjamy14.pdf

Exchange-Rate Regime and Economic Growth: A Review of the Theoretical and Empirical Literature

/pdf/taming-financiers-the-political-economy-of-exchange-rate-36pxu58aht.pdf

Taming Financiers: The Political Economy Of Exchange Rate Policy In Eastern Europe

Using a de facto classification of the exchange rate regimes adopted in Italy since national unification, this paper examines the influence of different exchange rate policies on the country’s economic performance. For perhaps the first time, a principal component analysis is used to obtain a composite indicator of the exchange rate policy de facto pursued by the monetary authorities. The study finds a significant association between exchange rate regimes and inflation and growth performance. In particular, the analysis reveals that Italy has performed best, in terms of output growth rate, under “soft peg” regimes, for example when the exchange rate was de facto pegged but the authorities were not legally committed to a fixed exchange rate or when rates were fixed but capital controls and adjustable pegs gave the authorities the opportunity to pursue independent macroeconomic policies. This result is at odds with recent literature according to which “corner solutions” — hard pegs or freely floating exchange rates — are the only viable exchange rate regimes (the so called “hollowing out” hypothesis). However, a closer inspection shows that this association between regimes and performance may actually reflect reverse causation, that is, a relationship that runs from the macroeconomic conditions of the country to the choice of an appropriate exchange rate regime rather than in the opposite direction. This does not exclude that exchange rate policy may play an important role in maintaining conditions of sustainability of economic growth. * Bank of Italy, London Representative Office

/pdf/exchange-rate-regimes-and-economic-performance-the-italian-32lf4ue1fp.pdf

Exchange Rate Regimes and Economic Performance: The Italian Experience

Although the importance for successful transition of a monetary policy aiming at a sustainable price level has often been stressed in the academic literature, there is still ample room for further research into the choice of the exchange-rate system throughout the different phases of the transition process. This article deals with the question of how the choice of a specific exchange-rate system affects the economic success of a country in transition and, above all, its gradual integration into the European Union (EU) and European Monetary Union (EMU). It focuses on the transition process in five South-Eastern European countries (SEECs).

/pdf/exchange-rate-regimes-and-the-transition-process-in-the-2pts5v18fo.pdf

Exchange-rate Regimes and the Transition Process in the Western Balkans

To examine whether a country's exchange rate regime has any impact on inflation and growth performance in transition economies, the authors develop an empirical framework that addresses some of the main problems plaguing empirical work in this strand of the literature: the Lucas critique, the endogeneity of the exchange rate regime, and the sample selection problem. Empirical results demonstrate that the exchange rate regime does affect inflation performance. the results suggest that: 1) Transition countries with intermediate arrangements might reduce inflation if they were to adopt a fixed regime. 2) Switching from a floating regime to an intermediate regime might not reduce inflation. 3) An unanticipated float--when a country whose fundamentals make it unlikely to adopt another regime adopts a floating regime--results in lower inflation. Based on their results, it is not possible to infer more about one particular exchange rate regime being superior to another in terms of growth performance. But empirical findings do underscore the different effects that policy variables--and other variables influencing economic activity--have on growth under different exchange-rate arrangements.

Does the Exchange Rate Regime Affect Macroeconomic Performance : Evidence from Transition Economics

To examine whether the exchange rate regime in place has any impact on inflation performance in transition economies, the study develops an empirical framework that addresses some of the main problems plaguing empirical work in this strand of the literature. Empirical results demonstrate that exchange rate regime does make a difference for inflation performance. The findings indicate that transition countries with intermediate arrangements may achieve lower inflation if they were to adopt a fixed regime. An interesting empirical finding worth highlighting is that an unanticipated float—a situation describing a country where fundamentals suggest that it is likely to adopt another regime, but instead adopts a floating regime—results in lower inflation.

https://www.tcmb.gov.tr/wps/wcm/connect/179b79f2-4b7c-4b2e-b8ce-d9c6aa2ae955/dpaper64.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE179b79f2-4b7c-4b2e-b8ce-d9c6aa2ae955

Kyle Peters

Papers

Does the Exchange Rate Regime Affect Macroeconomic Performance : Evidence from Transition Economics

Does the Exchange Rate Regime Matter for Inflation? Evidence from Transition Economies

Does the exchange rate regime affect macroeconomic performance: evidence from transition economics