ON EXCHANGE RATE FLEXIBILITY AND MACROECONOMIC IMPLICATIONS

Abstract

The global financial great recession has had its toll on the global economy for over a decade with signs of recovery emerging recently. The paper examines the effects of external and domestic fluctuations on the growth and inflationary effects in a sample of 18 developing countries and 27 advanced countries. In addition, the analysis considers accompanying fluctuations in the exchange rate to evaluate the relevance of these fluctuations to the real and inflationary effects with respect to major domestic and external shifts. The empirical model accounts for anticipated and unanticipated changes and differentiate between the effects of the exchange rate movements on the demand and supply sides of the economy. Through these channels, exchange rate flexibility may differentiate the real and inflationary effects of domestic and external shifts. The evidence highlights channels where exchange rate flexibility differentiates economic performance, which varies across countries based on the degree of openness, uncertainty, and dependency on imports. These differences appear to differentiate the exchange rate pass-through between developing and advanced countries. The evidence warrants careful evaluation by central banks regarding channels of the transmission of exchange rate flexibility to the macro economy as they continue to assess the appropriateness of a given exchange rate policy and its implications.

Keywords:

Real growth, price inflation, exchange rate movements, co-movements