Exchange rate regime

Several political and economic factors are involved in choosing exchange rate policy in Organization of Islamic Cooperation (OIC) countries. In the present study, these factors have been investigated with an emphasis on OCA and political economic factors during 1990 -2014. The result shows that OCA and political economic factors as well as tradable sector are influential on exchange rate policy in OIC countries. In a way that oil revenue, financial development, GDP, openness of the economy, economic development and political instability all tend to increase the probability of pegging the exchange rate regimes, whereas an increasing industrial sector and size of the economy lead to a decrease in the probability of pegging the exchange rate regimes. Inflation, democracy, political system, legislative system, and monetary crises had no significant effect on the exchange rate regime. Also, the results show that the democracy and oil revenue had the highest impact on choosing exchange rate regime and financial development and monetary crises risk had the least impact on choosing exchange rate regime. JEL Classification: F31, C01

The exchange rate is one of the crucial and effective variables in the economy of countries and contributes to the current and future economic conditions of every country significantly and undeniably by impacting many economic variables. Thus, selecting an optimal exchange system is imperative for countries. This study has investigated effective economic and political factors in selecting exchange regimes in three groups of developing countries, i.e., low-income countries, lower-middle-income countries, and upper-middle-income countries in the 2000-2018 period using the logit panel method. The results showed that for the lower-middle-income countries, the escalation of the trade balance increased the likelihood of selecting a floating exchange rate regime, and the uptrend of the Human Development Index (HDI) decreased the probability of choosing a floating exchange rate regime. Concerning the lower-middle-income countries, the upsurge of civil liberties and HDI diminished the likelihood of selecting a floating exchange regime, and the rise of the inflation rate increased the possibility of choosing a floating exchange regime. Finally, considering the third group, i.e., upper-middle-income countries, the increase in the Gross Domestic Product (GDP) made the selection of a floating exchange regime more likely, and the HDI elevation enhanced the probability of selecting a fixed exchange rate.