How Economic, Political and Institutional Factors Influence the Choice of Exchange Rate Regimes? New Evidence from Selected Countries of the MENA Region

Abstract

In this paper, we investigate how economic, political, and institutional factors affect the choice of exchange rate regimes using data on eight Middle East and North Africa (MENA) countries over the 1984-2016 period. Specifically, we run random-effects ordered probit regressions of the likelihood of exchange rate regimes on the potential determinants of exchange rate regimes. Three important findings emerge from the analysis. The first finding is that political and institutional factors play an important role in determining the exchange rate regime in MENA countries, where a democratic political regime and a low level of corruption increase the probability of opting for a fixed regime, while strong governments, political stability (such as less internal conflicts and more government stability), more law and order enforcement, and a left-wing government decrease the probability of opting for a fixed regime. The second finding is that bureaucracy, independent central banks, elections, terms of trade, and monetary independence have no effect on the choice of exchange rate regimes. The third finding is that financial development is not a robust determinant of the choice of exchange rate regimes. Our results still hold when considering alternative specifications, and they have important implications for policymakers in MENA countries