Unraveling Exchange Rate Volatility Impact on Economic Growth: A Study of developing Countries through the Lens of Exchange Rate Regimes .and Financial openness

The paper investigates the relationship between exchange rate volatility and economic growth in developing countries. It utilizes a sample of 31 developing countries and covers the period from 1992 to 2022. The study employs the difference and system Generalized Method of Moments estimators (GMM) to conduct an empirical analysis. The findings indicate that both nominal and real effective exchange rate volatility, as measured by the generalized autoregressive conditional heteroskedasticity (GARCH) model, have a negative impact on economic growth. This suggests that higher levels of exchange rate volatility tend to hinder economic growth in the sampled countries. Furthermore, the study suggests that the effect of exchange rate volatility on economic growth is contingent upon two factors: exchange rate regimes and financial openness. Specifically, the negative impact of volatility is more pronounced in countries with flexible exchange rate regimes and higher degrees of financial openness. This implies that countries with flexible exchange rate regimes, where the value of the currency is determined by market forces, are more susceptible to the adverse effects of exchange rate volatility on economic growth. Similarly, countries with higher levels of financial openness, characterized by greater integration with international financial markets, are also more affected by exchange rate volatility. The study highlights the importance of stabilizing exchange rates and managing volatility to promote economic growth, particularly for countries with flexible exchange rate regimes and high financial openness. Policy measures aimed at reducing exchange rate volatility and enhancing stability may help mitigate the negative impact on economic growth in these countries.