Prague Economic Papers 2024, 33(1):36-59 | DOI: 10.18267/j.pep.852

Financial Account Determinants Of Exchange Rate Regime Switching In Developing Countries

Viktar Dudzich ORCID...
Department of Monetary Theory and Policy, Prague University of Economics and Business, 130 67, Prague, Czech Republic

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.

Keywords: financial account, exchange rate regime, foreign capital flows, currency crisis, reserve assets
JEL classification: F15, F21, F31

Received: July 17, 2023; Revised: October 24, 2023; Accepted: November 14, 2023; Published: February 22, 2024  Show citation

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Dudzich, V. (2024). Financial Account Determinants Of Exchange Rate Regime Switching In Developing Countries. Prague Economic Papers, 33(1), 36-59. doi: 10.18267/j.pep.852
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