Exchange Rate Dynamics and Economic Growth in Developing and Emerging Countries: A Theoretical and Empirical Perspective

Abstract

This article provides a comprehensive review of both theoretical and empirical research on the selection and evaluation of exchange rate regimes. The literature on this subject can be broadly classified into two main strands. The first consists of classical studies that primarily focus on the differences between fixed and floating exchange rate systems, analyzing their respective advantages and limitations. These studies assess how each system affects macroeconomic stability, inflation control, and external imbalances.

The second strand includes more recent research that highlights the trade-offs between credibility and flexibility in exchange rate policies, with a particular emphasis on their impact on economic performance. These modern studies explore intermediate exchange rate arrangements, such as managed floats and crawling pegs, to determine their effectiveness in maintaining stability while allowing for necessary adjustments in response to economic shocks.

Beyond this general classification, the review pays special attention to the literature addressing the choice of exchange rate regimes in developing and emerging economies. These countries face unique structural and macroeconomic challenges, including external vulnerability, limited financial market development, and susceptibility to speculative attacks. As a result, the choice of an appropriate exchange rate policy requires a careful assessment of trade-offs between monetary independence, price stability, and external competitiveness.

By synthesizing the key findings from various studies, this review aims to contribute to a better understanding of the determinants and consequences of exchange rate regime selection in different economic contexts, particularly in developing nations.

Keywords: Exchange rate, exchange rate regimes, developing countries, economic performance, monetary policy.

JEL Classification : E52, O47, F31, C22

Paper type:, Theoretical Research