Financial Account Determinants Of Exchange Rate Regime Switching In Developing Countries
Financial Account Determinants Of Exchange Rate Regime Switching In Developing Countries

Summary/Abstract: The paper explores the interconnections between foreign capital flows and the exchange rateregime switching in developing countries. We formulate the exchange rate regime switchingas annual time series of binary/ordered variables employing de facto classification of exchangerate arrangements and regress them on the financial account capital flows for a panel of 28developing countries which experienced change in their exchange rate regime during the period2000–2016. Employing probit and logit regression, we discover the FDI, portfolio flows andchanges in reserve assets to precede and/or coincide with switching. Specifically, accumulationof foreign reserves increases the probability of switching from floating to peg, while theirspending coincides with exits from pegged regimes; at the same time, outflows of FDI andportfolio investments tend to accompany exchange rate regime liberalization, although theevidence on that is less consistent.

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