Floating versus fixed: How exchange rate regimes affect business cycles comovement between advanced and emerging economies

Abstract

This article investigates the effects of the different exchange rate regimes on business cycles comovement between advanced and emerging countries. We use the Granger Causality test (VAR model) on panel data to examine the causal relationships. Our findings show the existence of a bidirectional causal relationship between output comovement and the exchange rate regimes. We check the robustness of our results by applying Dumitrescu-Hurlin (2012) panel causality test that confirms our findings. Furthermore, the impulse response functions illustrate that business cycles comovement between advanced and emerging economies responds positively and significantly to the exchange rate regimes of these two groups of countries in the short term. However, the positive effect begins to wane before being negative from the third quarter and the fifth quarter for emerging economies and developed economies, respectively.

Keywords:

• Business cycle
• exchange rate regime
• synchronization
• emerging economies
• advanced economies

JEL:

• E32
• F44
• E42
• F15
• F31

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Data refer to Gross Domestic Product (GDP) based on share in world total Purchasing Power Parities (PPP). The source is the International Monetary Fund (IMF), “World Economic Outlook” database, April 2018.

2. The source is the International Monetary Fund (IMF), “World Economic Outlook” report, April 2009.

3. This method is used several times in IMF reports, we can cite as an example “World Economic Outlook”, April 2009, chapter 3.

4. We use the IMF classification. These countries are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain, Australia, Canada, Hong Kong, Czech Republic, Denmark, Iceland, Israel, Japan, Korea, New Zealand, Norway, Singapore, Sweden, Switzerland, United Kingdom and United States.

5. We use the IMF, S&P and Dow Jones classifications. These countries are Bangladesh, China, India, Indonesia, Malaysia, Philippines, Thailand, Bulgaria, Hungary, Poland, Romania, Turkey, Russia, Ukraine, Egypt, Pakistan, Qatar, Emirates, South Africa, Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.

Additional information

Funding

The author received no direct funding for this research.