The Determinants of Optimal Exchange Rate Regimes in High and Low Oil-Producing Countries

Abstract

This research studies the theoretical determinants of the exchange rate regime choice in oil-producing countries and investigates whether these choice determinants differ if oil-producing countries classified as high (HOP) and low (LOP) oil-producing countries. To gain insight into these issues, governance indicators are introduced in addition to the main theoretical determinants to determine whether these variables play significant roles in regime decisions. An ordinal probit model was utilized to examine panel data from 38 oil-producing countries from 1996 to 2015. The results support the research hypothesis that the determinants of the choice of exchange rate regime differ between HOP and LOP countries. This difference was evident when governance indicators were included in the model in the de jure classifications for HOP and LOP countries. The main policy implication is that enhanced governance indicators provide support for a fixed exchange rate regime in oil-producing countries.