Intermediate Exchange Rate Regime And Economic Growth

As one of the main objectives of a country’s macroeconomic policy,economic growth is an important basis for determining the country’s macroeconomic situation, it’s also essential for the country’s authorities to formulate relative economic policies to promote economic development. By learning the process of exchange rate regime selection, we find that theoretical and empirical literatures on how exchange rate regimes affect economic growth continue to increase, they systematically studied the different roles of different exchange rate regimes on a country’s economic growth. However, few literatures study the relationship of intermediate exchange rate regime and economic growth. How intermediate exchange rate regime may exactly affect economic growth? In what ways and what’s the effects ? Researches on these issues are not only of theoretical significance, but also meaningful for a country to select the appropriate exchange rate regime. Therefore, we choose the emerging market countries and developed countries as samples, by comparing the different effects between these two types of countries, the mechanism can be obvious. Then according to the actual situation of our country, we try to put forward some countermeasures and suggestions.On the basis of Reinhart and Rogoff criteria for the classification of the exchange rate regime, this paper first analyzes the current status of different countries on the choice of intermediate exchange rate regime and their per capita GDP growth rate.The analysis believes that the proportion for intermediate exchange rate regime countries is stable at around 40%. Except the crisis years of emerging market countries, the average per capita GDP growth rate of intermediate exchange rate regime countries is higher than the fixed and floating exchange rate regime countries. Then this paper introduces the relationship of intermediate exchange rate regime and economic growth from a theoretical point of view. The target zone theory and Mundell-Fleming model extension theory show that proactive fiscal and monetary policies to maintain intermediate exchange rate regime will promote economic growth. Capital inflows also affect the effect of the policies. The crawling band theory believes that intermediate exchange rate regime provides favorable conditions to achieve higher economic growth. In the following, taking emerging markets and developed countries panel data of 1991-2010 for example, the first step is to test variables stability, after that the empirical results based on OLS estimate show that intermediate exchange rate regime does affect the level of a country’s economic growth, proactive fiscal and monetary policies can promote economic growth. In addition, the intermediate exchange rate regime will also affect capital inflows’ effect on economic growth, international capital flows will help improve the level of a country’s economic growth. The increase of broad money supply(M2) and the share of capital inflows in GDP will bring positive effect to per capita GDP growth rate.What’s more,the influence on the developed countries is greater than emerging market countries, but the impact of government spending on per capita GDP growth in emerging market countries is more significant. It’s also important to pay attention to trade, inflation and demographic factors. Finally, according to the reality of our situation, this paper puts forward the following countermeasures and suggestions: our country should increase the money supply at the same time pay attention to controlling inflation, deepen the financial reform of China, improve the monetary policy transmission mechanism, thereby reducing the money supply endogenous; we might also increase government expenditure particularly on the energy transportation, agriculture, culture, health and education; reasonable arrangements for the structure of capital account liberalization is necessary at the same time, releasing the control on the stock market, and gradually opening fund trusts and derivatives markets, while also strengthening the regulation of capital flight; what’s more, reforming our country’s exchange rate mechanism, increasing the exchange rate flexibility, and gradually expanding the range of the RMB exchange rate fluctuations around the center.This paper has two innovative aspects: one is empirical research methods, besides a number of factors that influence economic growth, this paper takes focus on the effects of intermediate exchange rate regime dummy variable for monetary and fiscal policy variables and variables on capital inflows with economic growth. It analyzes the connection of intermediate exchange rate regime and economic growth through the establishment of the panel regression multivariate model.The current literatures of separately study the impact of intermediate exchange rate regime on the economic growth is relatively rare. In addition, this paper uses Reinhart and Rogoff ’s criteria for the classification of exchange rate regimes to definite intermediate exchange rate regime. In this way, the study of intermediate exchange rate regime can be more scientific and detailed. In this paper, the other innovative aspect is that it is unique in the selection of the sample countries. The emerging market countries and developed countries selected are all approved by many authoritative unified organizations, sample data and the timing are more reasonable, these all make more convincing conclusions. Of course, there are still many deficiencies, such as taking into account of the availability of sample data, this paper only selects data before 2010, it can be further updated. On the other hand, as the author’s ability of empirical research is limited,this paper only does static analysis for the panel data, if we can make further dynamic analysis, the results may be more comprehensive.