Exchange Rate Flexibility and Macroeconomic Stability

A Panel Data Modeling Approach

Abstract

The exchange rate regime is a central element of a country’s economic policy, playing a crucial role in its macroeconomic stability and global competitiveness. Over the decades, Morocco, like many other countries, has seen its exchange rate regime evolve significantly. After more than ten years under a controlled exchange rate regime, the country adopted a semi-floating exchange rate regime in 2018, characterized by occasional central bank interventions. This transition reflects the fundamental objectives of Moroccan economic policy, aiming to ensure macroeconomic and financial stability, promote economic growth, and foster integration into the global economy. This evolution raises crucial questions about the impact of exchange rate flexibility on macroeconomic instability. This article aims to empirically analyze the impact of exchange rate flexibility on macroeconomic instability by addressing the following central question: To what extent would the Moroccan economy have been unstable if the country had adopted a floating exchange rate regime? Would a floating exchange rate have been preferable to a quasi-fixed regime? To address this issue, our work is structured into two distinct parts. The first part offers a brief literature review on exchange rate regimes and macroeconomic stability, providing a solid theoretical framework. The second part includes an empirical study using panel data from four countries (Morocco, Algeria, Egypt, and Turkey) for a comparative analysis.