The political economy of exchange rate regime determination: Theory and evidence

Kimakova, Alena

doi:10.1016/j.ecosys.2008.04.001

Cited by 10 publications

(5 citation statements)

References 44 publications

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“…Another important source of fear is stressed by Calvo and Reinhart (2002), Hausmann et al (2001), Tirole (2003), Eichengreen, Hausmann, and Panizza (2003), Alesina and Wagner (2006), Kimakova (2008), and Bleany and Ozkan (2011), and it consists in the extent to which debt is denominated in foreign currency or the inability to borrow internationally in domestic currency, so‐called ‘original sin’. In the case of countries that cannot borrow internationally in their domestic currencies, and consequently are exposed to exchange rate shocks and currency mismatches, the fear of floating can be viewed as a reflection of fear of financial collapse, speculative attacks, or at least, as Branson and Katseli (1981) have earlier noted, exchange market instability.…”

Section: Theoretical Foundations Of Divergencementioning

confidence: 99%

“…Levy-Yeyati and Sturzenegger (2005) found that the number of countries which run a fixed exchange rate regime without explicitly stating that they do has increased remarkably. Second, as stressed by Poirson (2001), Kimakova (2008), andRussell (2011), financial integration, political stability, and a high degree of accountability may act as a substitute to the commitment mechanism of a fixed exchange rate. In other words, advanced and stable economies are sufficiently trustworthy and do not need a pegged regime to fill their credibility gap.…”

Section: The Fear Of Floating Hypothesismentioning

confidence: 99%

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The Tunisian exchange rate regime: Is it really floating?

Bouabidi

2020

Int. J Fin Econ

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While the Tunisian authority claims to adopt a floating exchange regime, the International Monetary Fund (IMF) classifies it as a rather crawl‐like regime. This paper aims at studying the Tunisian exchange rate regime over the post‐revolution period. It uses daily data from 2010 to 2019. The empirical results show that the Tunisian de facto regime is broadly consistent with the IMF classification. Nevertheless, the IMF stated that in 2018 the EUR is the only anchor, but this study shows that from 2017 the implicit weight of the USD becomes higher than the EUR. Most of the time, there is a discrepancy between the regime claimed by the Tunisian authority and the de facto regime detected by the model. Annual regressions, the Chow, and the Bai‐Perron breakpoint tests show that the Tunisian de facto regime is not stable.

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Section: Theoretical Foundations Of Divergencementioning

confidence: 99%

Section: The Fear Of Floating Hypothesismentioning

confidence: 99%

The Tunisian exchange rate regime: Is it really floating?

Bouabidi

2020

Int. J Fin Econ

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“…Myers and Majluf ( 1984 ), Fan et al ( 2012 ), and Demirguc-Kunt and Maksimovic ( 1999 ) find that short-term debts are likely to dominate in highly corrupted economies because they are safer than long-term debts (the domestic side of the original sin). In addition, as stressed by Poirson( 2001 ), Kimakova ( 2008 ), and Russell ( 2011 ), countries characterized by political instability and a low degree of accountability use the exchange peg as a commitment mechanism and a sign of credibility. Overall, corruption and weak law enforcement make it difficult to borrow for the long term in domestic as well as in foreign capital markets in domestic currency.…”

Section: The Foreign Debt Constraintmentioning

confidence: 99%

The surge in Tunisia foreign debt: causes and possible ways out

Bouabidi

2023

SN Bus Econ

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Over the last decade (2010–2020), Tunisia foreign debt has experienced a phenomenal jump. It has increased at a faster pace than domestic debt. It has doubled without any significant positive effect on investments or economic growth. This study aims to identify the major causes of this abnormal increase in Tunisia foreign debt. Since the model variables are not all stationary at level, the paper applies the autoregressive distributed lag technique to quantitative quarterly economic data covering the 2009–2020 period. Findings show that the economic growth, the exchange rate, the current deficit, the coverage ratio, and the lagged foreign debt itself are the major causes leading to the phenomenal increase of Tunisia foreign debt. Based on these findings, the paper suggests boosting foreign currency-generating activities, containing current public expenditures, stabilizing the exchange rate, and making structural economic adjustments as possible escape roots. Supplementary Information The online version contains supplementary material available at 10.1007/s43546-023-00443-2.

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“…The political strength and stability literature argue that the political environment of a country impacts the choice of exchange rate regime, that is, strong governments favour a flexible regime, whereas unstable governments promote a fixed regime (Kimakova, ; Levy‐Yeyati et al., ). Political business cycle studies highlight that politicians may influence the exchange rate prior to elections in order to realise short‐term macroeconomic objectives, that is, output growth and employment (Hossain, ).…”

Section: Literature Reviewmentioning

confidence: 99%

The Effect of Government Ideology on an Exchange Rate Regime: Some International Evidence

Chang

2013

World Economy

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This paper comprehensively investigates the effect of government ideology on the type of exchange rate regime that a country implements via multinomial logit and multinomial probit models for 147 countries in the period 1974–2009. Our results clearly indicate that a left‐wing government increases the likelihood that a country implements a flexible regime in the classifications of exchange rate regimes. Nevertheless, evidence is weaker when using the de jure IMF course classification, which is set up by Ilzetzki et al. (). In a deeper investigation, we find that left‐wing governments are more likely to choose a flexible regime relative to a fixed one in our sample of OECD, non‐OECD and non‐Eurozone countries, as the impacts from government ideology on the determinant of the choice of exchange rate regime in Eurozone countries disappear. More importantly, we present many explanations for exchange rate regime choices when macroeconomic conditions, political constraints and institutions impact the choice of exchange rate regime.

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The political economy of exchange rate regime determination: Theory and evidence

Cited by 10 publications

References 44 publications

The Tunisian exchange rate regime: Is it really floating?

The Tunisian exchange rate regime: Is it really floating?

The surge in Tunisia foreign debt: causes and possible ways out

The Effect of Government Ideology on an Exchange Rate Regime: Some International Evidence

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