Evaluating the Effect of Exchange Rate Regimes on Economic Performance and Monetary Policy Effectiveness

Posted: Aug 26, 2015

• Sarah Lopez
• Sarah Miller
• Sarah Young

Abstract

This research presents a novel computational framework for analyzing exchange rate regimes through the lens of complex adaptive systems theory, departing from traditional econometric approaches that have dominated the field. We develop a multi-agent simulation environment that models central banks, commercial banks, firms, and households as autonomous agents with bounded rationality and adaptive learning capabilities. Our methodology incorporates machine learning techniques to simulate policy decision-making processes and evolutionary algorithms to model market adaptation over time. The research addresses three fundamental questions: How do different exchange rate regimes affect economic stability under varying conditions of market complexity? To what extent do fixed versus floating regimes constrain monetary policy effectiveness during financial crises? And how do regime choices interact with institutional quality and financial market development? Our findings reveal several counterintuitive results, including that intermediate regimes often outperform pure floats or hard pegs in maintaining economic stability, and that the effectiveness of monetary policy is highly dependent on the synchronization between exchange rate flexibility and capital account openness. The simulation results demonstrate that optimal regime choice is context-dependent rather than universally applicable, challenging conventional policy prescriptions. This research contributes to the literature by providing a dynamic, computational alternative to static equilibrium models and offers policymakers a more nuanced understanding of regime selection in an increasingly interconnected global economy.