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Effects of Exchange Rate Regime on IMF Program Participation
Author(s) -
Trudel Robert
Publication year - 2005
Publication title -
review of policy research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.832
H-Index - 45
eISSN - 1541-1338
pISSN - 1541-132X
DOI - 10.1111/j.1541-1338.2005.00181.x
Subject(s) - exchange rate regime , exchange rate , economics , monetary economics , ordered probit , fixed exchange rates , developing country , fixed effects model , international economics , probit model , floating exchange rate , probit , foreign exchange reserves , panel data , econometrics , economic growth
This article investigates the effect of a domestic policy choice, the exchange rate regime, on countries’ interaction with an international institution, their participation in International Monetary Fund (IMF) lending agreements. I hypothesize that the effect of the level of international reserves on a country's probability of participation in an IMF program depends on the exchange rate regime. A low level of international reserves threatens unfavorable economic and political outcomes only in countries that maintain a fixed exchange rate regime. The level of reserves may thus be a significant determinant of participation in IMF programs only for countries that maintain a fixed exchange rate regime. I use a dynamic univariate probit model of IMF program participation to assess empirically the effect of reserves in countries that maintain fixed, intermediate, and floating exchange rate regimes. The empirical results support my hypothesis: reserves have a significant effect only in countries that maintain a fixed exchange rate.