How Do Countries Choose their Exchange Rate Regime?

Author: Ms. Hélène Poirson

Volume/Issue: Volume 2001 Issue 046

Publication date: May 2001

ISBN: 9781451846553

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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Banks and Banking , WP , exchange rate , FLT , currency , government , exchange rates , developing countries , dollarization , optimal currency areas , choice regression , flexibility index , government temptation , regime decision , nominal exchange rate , IMF classification , Exchange rate arrangements , Exchange rate flexibility , Conventional peg , Exchange rate risk , Africa , Middle East , East Asia , Europe

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Summary

This paper investigates the determinants of exchange rate regime choice in 93 countries during 1990-98. Cross-country analysis of variations in international reserves and nominal exchange rates shows that (i) truly fixed pegs and independent floats differ significantly from other regimes and (ii) significant discrepancies exist between de jure and de facto flexibility. Regression results highlight the influence of political factors (political instability and government temptation to inflate), adequacy of reserves, dollarization (currency substitution), exchange rate risk exposure, and some traditional optimal currency area criteria, in particular capital mobility, on exchange rate regime selection.