Determinants of monetary policy frameworks in emerging and developing countries

This paper investigates the determinants of countries’ choice of monetary policy frameworks for emerging and developing countries. It draws on the literature concerning how exchange rate regimes are determined, and the much smaller body of literature on determination of monetary policy frameworks (for advanced and emerging countries), to identify 3 approaches that account for countries’ choice of monetary policy framework. We empirically test the joint relevance of the variables within each theory and find them to be jointly statistically significant. A key highlight of this paper is that it uses an (emerging and developing) country tailored variable that measures trade networks of potential currency blocs. The model correctly predicts 79% of countries’ choice of framework, when aggregated by target variable, and 84% of countries’ choices, when aggregated by degree of monetary control.