BUDGET DEFICITS AND THE CHOICE OF EXCHANGE RATE REGIME: THE CASE OF ECOWAS COUNTRIES

Author: Braima Luís Soares Cassama

ABSTRACT

This article examines the effect of budget deficits on exchange rate regimes in the ECOWAS region. The empirical literature dealing with the problem of choosing an appropriate exchange rate regime generally relies on the analysis of logit models. This type of model has proved to be an effective tool for characterising the relationship between the typology of exchange rate regimes and their determinants. This article follows a similar methodological line by exploiting the World Bank database covering the period 2000-2020. Our results show that the budget deficit has a significant impact on the choice of exchange rate regime. Our estimates also show that financial development, inflation and political stability are also determinants in the choice of an exchange rate regime. The empirical results highlight that the optimal regime depends strongly on the macroeconomic challenges facing the region and its situation.

Keywords: Deficit, exchange rate regime, inflation, ECOWAS. JEL classification: C51, C54, C58, E58, F36

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