The effects of exchange rate regimes on economic growth: evidence from propensity score matching estimates

Abstract

This is the first study that employs the propensity score matching framework to examine the average treatment effect of exchange rate regimes on economic growth. Previous studies examining the effects of different exchange regimes on growth often apply time series or panel data techniques and provide mixed results. This study employs a variety of non-parametric matching methods to address the self-selection problem, which potentially causes a bias in the traditional linear regressions. We evaluate the average treatment effect of the floating exchange rate regime on economic growth in 164 countries. Time period of the quasi experiment starts in 1970, capturing the collapse of the Bretton Woods fixed exchange rate commitment system. Results show that the average treatment effect of floating exchange rate regimes on economic growth is statistically insignificant. Verifying the results with the Rosenbaum's bounds, our findings are strong and robust. The research states that there is no evidence that employing a floating exchange rate regime compared to a fixed one leads to a higher economic growth for the countries that use this particular policy.