Macroeconomic Performance and Exchange Rate Regimes

Abstract

In this chapter we examine the issue of whether macroeconomic performance is affected by the underlying exchange rate regime. It is arguable that the way in which monetary and fiscal policies affect inflation and growth depend on the exchange rate regime. Macroeconomic performance under various exchange rate regimes depends on macroeconomic policy as well as external effects. A study conducted by the International Monetary Fund (1984) lists four criteria for evaluating an exchange rate regime with respect to its effect on the economy. These criteria are the following:

• Contribution (or otherwise) of the regime to macroeconomic policy in pursuit of domestic economic objectives pertaining to inflation, growth and employment.

• The effectiveness of the regime in promoting balance of payments adjustment.

• The effect of the regime on the volume and efficiency of world trade.

• The robustness and adaptability of the regime to significant changes in the global economic environment.