Short-Term and Long-Term Growth Effects of Exchange Rate Adjustment

Abstract

The European sovereign debt crisis revived the discussion concerning the pros and cons of exchange rate adjustment in the face of asymmetric shocks. Exit from the euro area is to regain rapidly international competitiveness. Exchange rate stability with structural reforms could be beneficial for long-run growth. We augment the literature by analyzing short- and long-term growth effects of exchange rate flexibility in a panel-cointegration framework. Countries with a high degree of exchange rate stability exhibit lower short-term and higher long-term growth. The degree of business cycle synchronization with the anchor country matters for the impact of exchange rate flexibility on growth

Keywords: exchange rate adjustment, sterilization, European sovereign debt crisis

JEL Classification: C54, E32, E42, F32, F33, N20