Does the Nominal Exchange Rate Regime Matter?WP/95/121-EA Does the Nominal Exchange Rate Regime Matter? by Atish R. Ghosh, Anne-Marie Gulde, Jonathan D. Ostry, and Holger C. Wolf Does the choice of the nominal exchange rate regime systematically influence the behavior of key macroeconomic variables, nominal or real? Economic theory has yet to yield unambiguous conclusions: increased nominal exchange rate flexibility has been argued both to aggravate and to reduce output variability, to enhance and to suppress trade, to raise and to lower investment, and to raise and to lower inflation. Revealed preference, moreover, does not suggest a clear ranking among exchange rate regimes. Eighty-six of the 136 countries sampled in this paper pursued some form of exchange rate peg, while the remaining 50 allowed their currencies to float. Deriving clear rankings is made difficult by the plethora of partly offsetting and partly reinforcing linkages between the exchange rate regime and a number of macroeconomic variables. Without evidence on which of these channels matters empirically, few general conclusions are possible. This paper presents stylized facts on the link between the exchange rate regime and two key macroeconomic variables--inflation and growth. A general, positive association is found between the degree of nominal exchange rate regime flexibility and inflation, a link deriving both from lower money supply growth (a discipline effect) and higher money demand growth (a credibility effect) under fixed rates. In contrast, overall growth performance is not found to differ across exchange rate regimes, though growth tends to be more variable under fixed exchange rate regimes. The sources of growth, however, do vary significantly across regimes. Countries operating under fixed rates invest more and are more open, while countries under flexible rates enjoy faster residual productivity growth. |