The European periphery during the crisis: fix or float?

Abstract

This article empirically investigates the growth performance of European noneuro area countries during the recent global crisis depending on their respective exchange rate regime. Usually, floating exchange rate regimes are considered to better help countries cope with negative real shocks. However, for countries with close ties to the euro area, the advantages of pegging their exchange rate to the euro might dominate even during such a crisis. By applying standard panel growth regressions, the empirical analysis shows that during the crisis, countries with a floating exchange rate (i.e. those that should be better able to react to a crisis) did indeed grow more successfully.