Exchange rate regime choice and the external sector

This study investigates the choice of de facto exchange rate regime and the consequences for some external sector variables such as the change in international reserves, the total stock of international reserves, foreign direct investment, and foreign capital flows. The issue of contractionary devaluation is also addressed and the effect of the exchange rate regime on the domestic output gap is examined. Political economy and optimum currency area theory guide the empirical work. The Simultaneous Equations with Limited Dependent Variable model is the main econometric tool I use to study the experiences of five Southeast Asian nations and five Latin American nations over the period 1984--2004. Other techniques employed include the Seemingly Unrelated Regressions model, a model with interaction terms, and a test of non-linearity using dummy variables. Empirical results suggest that there are links between the exchange rate regime and the macroeconomic variables considered. It is also shown that the type of exchange rate regime selected has implications for the degree of capital controls