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Financial Account Determinants Of Exchange Rate Regime Switching In Developing Countries

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  • Viktar Dudzich

Abstract

The paper explores the interconnections between foreign capital flows and the exchange rate regime switching in developing countries. We formulate the exchange rate regime switching as annual time series of binary/ordered variables employing de facto classification of exchange rate arrangements and regress them on the financial account capital flows for a panel of 28 developing countries which experienced change in their exchange rate regime during the period 2000-2016. Employing probit and logit regression, we discover the FDI, portfolio flows and changes in reserve assets to precede and/or coincide with switching. Specifically, accumulation of foreign reserves increases the probability of switching from floating to peg, while their spending coincides with exits from pegged regimes; at the same time, outflows of FDI and portfolio investments tend to accompany exchange rate regime liberalization, although the evidence on that is less consistent.

Suggested Citation

  • Viktar Dudzich, 2024. "Financial Account Determinants Of Exchange Rate Regime Switching In Developing Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2024(1), pages 36-59.
    • Handle: RePEc:prg:jnlpep:v:2024:y:2024:i:1:id:852:p:36-59
    DOI: 10.18267/j.pep.852
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    More about this item

    Keywords

    financial account; exchange rate regime; foreign capital flows; currency crisis; reserve assets;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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