The effects of exchange rate regimes on economic growth: a literature review

Abstract

This article presents a review of the literature on the effects of exchange rate regimes on economic growth. Exchange rate regimes, which define the way in which the currency of one country is linked to those of others, vary between fixed, floating and hybrid systems. The aim of the study is to explore the impact of these regimes on economic performance through an analysis of the mechanisms involved and the empirical results observed in previous research.

The paper argues that in a fixed exchange rate regime, exchange rate stability and price predictability can stimulate economic growth by reducing uncertainty, thereby encouraging foreign investment. However, this regime has its limitations, notably the loss of flexibility in times of economic shocks, and often requires intervention by monetary authorities to maintain parity. Conversely, floating exchange rate regimes offer greater flexibility, allowing exchange rates to adjust to internal and external economic conditions. This flexibility can facilitate adjustment in times of crisis, but it also generates greater exchange rate volatility, which can be detrimental to growth.

Hybrid regimes, which combine elements of both fixed and floating systems, can represent an interesting compromise. They make it possible to combine stability and flexibility, although their effectiveness depends on the economic specificities of each country.

Keywords: economic growth, exchange regime, exchange rates.

JEL Classification : F31, E43, O47, F41  

Paper type: Theoretical Research