; Armand Fouejieu (EUR); and Mishel Ghassibe and Samir Elsadek (summer interns). It incorporates input from staff in other IMF departments, as well as experts from the World Bank, International Finance Corporation, Asian Development Bank, and International Organization of Securities Commissions, including via an iLab brainstorming session. 1 The Middle East and Central Asia region refers to 31 countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and in the Caucasus and Central Asia (CCA). Financial inclusion is defined as the access to, and use of, formal financial services.
This paper investigates the effects of the adoption of inflation targeting (IT) on the choice of exchange rate regime in emerging markets (EMs), conditional on certain macroeconomic conditions. Using a large sample of EMs and after dampening the endogeneity of the adoption of IT using a selection on observables, we find that IT countries on average have a relatively more flexible exchange rate regime than other EMs. However, the flexibility of the exchange rate regime shows strong heterogeneity among IT countries. IT countries with low trade and financial openness and with a large share of external debt exhibit a lower exchange rate flexibility than others. Moreover, the marginal effect of IT adoption on the exchange rate flexibility increases with the duration of the IT regime in place, and with the propensity scores to adopt it.
After the decline in oil prices, many oil exporters face the need to improve their external balances. Special characteristics of oil exporters make the exchange rate an ineffective instrument for this purpose and give fiscal policy a sizeable role. These conclusions are supported by regression analysis of the determinants of the current account balance and of the trade balance. The results show little or no relationship with the exchange rate and, especially for the less diversified oil exporters, a strong relationship with the fiscal balance or government spending.
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