The Interaction Between Capital Controls and Exchange Rate Regimes: Evidence from Developing Countries

The choice of the exchange rate regime and the capital account regime are among the core macro economic policy decisions for developing countries, with important repercussions for a country's macro economic stability, ability to attract foreign capital, and international trade. Existing literature has considered the determinants of these decisions, taking the capital account regime as given when considering the exchange rate regime and vice versa. This paper provides an empirical analysis of the interaction between the two regime choices treating both as simultaneously endogenous. Using a panel data set for developing countries in the 1980s and 1990s, we estimate a simultaneous-equations panel mixed logit model for the joint determination of both choices. We find strong influences from the official, de jure exchange rate regime on capital account policies, but only weak feedback effects. Using de-facto exchange rate regimes, the influences in both directions are similar to each other.