Impact of Exchange Rate Regimes on Financial Stability in Developed and Developing Economies

Ali, Amjad and Anjum, Rana Muhammad Adil and Irfan, Muhammad (2025): Impact of Exchange Rate Regimes on Financial Stability in Developed and Developing Economies.

Abstract

This study investigates the impact of different exchange rate regimes on financial stability across both developed and developing countries from 2005 and 2023. Exchange rate policy is a critical component of a nation's macroeconomic framework, influencing key financial indicators and institutional dynamics. Employing a mixed-methods approach, data sources are the International Monetary Fund, World Bank, and Bank for International Settlements. The regression analysis reveals that developed economies tend to perform better under floating exchange rate regimes, owing to stronger institutional frameworks and greater policy flexibility. Furthermore, the study highlights the significant influence of regime type on financial indicators such as inflation, foreign reserves, and current account balances. It underscores the importance of institutional strength, credible monetary policy, and effective governance in the successful implementation of exchange rate regimes. These findings offer valuable insights for policymakers in tailoring exchange rate strategies to national economic contexts. The study recommends that countries align their regime choices with local economic conditions, reinforced by disciplined macroeconomic management and enhanced transparency.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange Rate Regimes, Financial Stability, Monetary Policy, Inflation Volatility
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

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