Exchange Rate Volatility and Growth in Emerging Europe and East Asia

The paper investigates the impact of exchange rate volatility on growth in Emerging Europe and East Asia. Exchange stability has been argued to affect growth negatively as it deprives countries from the ability to react in a flexible way to asymmetric real shocks and may enhance the probability of speculative capital inflows and overheating. In contrast, exchange rate stability can be argued to affect growth in emerging market economies positively because transaction costs for international trade decline, uncertainty for international capital flows is less and macroeconomic stability is enhanced. Cross country panel estimations provide evidence for a negative impact of exchange rate volatility on growth both in Emerging Europe and East Asia.