The Exchange Rate Regime And Economic Performance:Study On Emerging Markets

The rapid economic recovery of emerging market countries attracted worldwide attention, after the global financial crisis. With the growing strength of the economy, the emerging market countries have more right to speak. Emerging markets hold large current account balance and foreign exchange reserves; so, many developed market countries attributed the global imbalance to undervaluing currencies and exchange rate manipulation of emerging market countries. One the one hand, emerging market countries faced with huge currency appreciation pressure, on the other hand, they faced with the negative impact of domestic economic growth and rising inflation rate that caused by currency appreciation. For emerging markets, how to choose the appropriate exchange rate regime and performance analysis has a very important significance.The paper is divided into five parts:The first part reviews the relevant theory and literature, including the classification of exchange rate regime and the theory of exchange rate regime. It is necessary and required of accurate classifying the exchange rate regime in the study exchange rate regime choice and economic performance. Beginning of this paper describes several different methods of exchange rate regime classification. The literature review section includes a introduction of the theory of exchange rate regime choice. This article focuses on the exchange rate regime choice of emerging market countries with the M-F model, the "impossible triangle" and the OCA theory as a theoretical basis of this article.The second part reviews the evolution of emerging market countries exchange rate regime since the1990s. Then analyze of reasons for the change and the difficult choice faced by emerging market countries. According to reviewing the exchange rate arrangement of emerging market countries, author found that these countries shift exchange rate regime from fixed to floating. But the emerging market counties don’t have the conditions to achieve a fully floating exchange rate regime, so they face with a dilemma. The BBC and MFP give some reference to emerging market countries.The third part is from the point of views of internal balance through a combination of theoretical and empirical analysis of the economic performance of the exchange rate regime in emerging market countries which from two aspects: growth and inflation. There is no uniform conclusion on the relationship between exchange and inflation or growth. Author established a multi-panel model to study the impact of exchange rate regimes to inflation and growth. The empirical results show that the exchange rate regime has an uncertain effect on inflation and growth. In comparison, floating exchange rate regime has a better anti-inflation performance than fixed exchange rate regime to emerging market countries. The growth depends on the fundamentals rather than exchange rate regimes.The forth part is basis of currency mismatch problems and vulnerability of financial system in emerging market countries. It mainly analyzes the economic performance of exchange rate regime from the perspective of external balance. Author established the Probit model to analyze the probability of crisis in emerging market countries which choice the different exchange rate regimes. The results show that the fixed rate exchange regime may reduce the crisis probability. Most of emerging market countries have serious currency mismatch problem. Author used AECM index to analyze the relationship between currency mismatch and exchange rate regime. In conclusion, the currency mismatch maybe related to the fixed exchange rate regime.The last part evaluates economic performance of RMB exchange rate regime, according to the analysis of the former. Author used the empirical method to analyze the economic performance of the RMB exchange rate regime. Through the establishment of Probit model, we can find when the government’s objective is stabilizing the price level, the floating exchange rate regime will be a better choice; contract, when the government’s objective is promoting economic growth, fixed exchange rate regime will be effective.The innovation of this paper: There are serious currency mismatch problem in the emerging countries, so it is important to putting the currency mismatch into the study of exchange rate regime performance. From internal and external balance aspects to analyze the exchange rate regime is an innovation of this paper. Compared with existing research which lack of empirical research in theoretical research, this paper tries to make the results more intuitive.The inadequacies of this article:Because of limitations of data, empirical analysis did not include the most recent year. The study didn’t contain the latest changes of the exchange rate regimes of emerging market countries.