Exchange rate regimes, equilibrium exchange rates and economic growth.

Summary In a context of increasing openness of economies, it is relevant to question the optimal choice of exchange rate regime for emerging countries. Our empirical study of the relationship between the exchange rate regime and growth has led us to conclude that there is no univocal link between the exchange rate regime and growth. More precisely, there would be no better exchange rate regime in all places and at all times. At the end of these reflections, it appeared that an appropriate level of exchange rate accompanied by the choice of an adequate exchange rate regime are consubstantial to better economic performance. To this end, after estimating the equilibrium real exchange rate based on a FEER model, we conducted a non-linear econometric analysis of the effects of exchange rate misalignments on growth. We found that this effect depends on the nature and size of the exchange rate misalignment. For emerging countries, the effect on growth is positive for small undervaluations and negative for large ones. In contrast, for advanced countries, undervaluation has a positive effect even beyond the estimated threshold. Overvaluations of the exchange rate have negative effects on growth. This asymmetric impact of exchange rate misalignments on growth highlights the importance of exchange rate policy on growth. Appropriate exchange rate policies that limit currency overvaluation could be used to promote economic growth.