| Commodity price volatility has extremely serious repercussions in developing countries, where the dependency of the productive sector and the fiscal budget on the export of one or a few commodities exacerbate the impact of a terms-of-trade shock. Macroeconomic management can buffer the effects of price volatility and, as commodity price volatility is essentially transferred into the economy by the exchange rate, exchange rate regimes play an important role.;This research investigates the role of exchange rate regimes in accommodating the impact of terms-of-trade shocks on output volatility and evaluates the benefit of output stabilization and attracting foreign direct investments in primary commodity exporting countries.;The first part of this dissertation consists of an empirical research aiming at investigating whether primary commodity producers with floating exchange rate regimes perform better after a real shock. Using a VAR model, consistent with Broda (2004), the results show that if the real GDP is measured in terms of purchasing power (i.e., CPI), flexible exchange rate regimes do perform better at insulating the output from external shocks. However, if the real GDP is measured in terms of GDP deflator, the results obtained are not consistent with Broda's results. After terms of trade shock, the real GDP measured using GDP deflator increases in countries that float their exchange regimes. Further analysis confirms the result that primary commodity exporting countries with heavy dependence on imports will not benefit from flexible exchange rate regimes as shock absorbers.;The second part of the dissertation establishes whether exchange rate regimes provide certain benefit for the primary commodity exporting countries such as attracting foreign direct investments (FDI). Using panel data estimation techniques, evidence shows that exchange rate regimes matter in attracting FDI, particularly regarding fixed regimes. |
