## _wp08132

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---

### Major findings and contributions
- Documents historical evolution of anchor currency choices and identifies key determinants explaining why countries peg to particular anchors.
- Uses a panel multinomial logit approach to empirically analyze anchor currency choice.
- Key empirical result: trade network externalities are a primary determinant of anchor currency choice. Benefits of using a particular anchor increase with the amount of trade with countries using the same anchor, producing strong bandwagon or snowball effects.
- Other robust determinants identified:
  - The symmetry of output shocks.
  - The currency denomination of liabilities.
  - Past anchor choice (persistence): past anchor choice is an important determinant of future anchor choice.
- Determinants tested for pegging versus floating include trade and capital account openness, economic size, reserve cover, financial development, the need to import monetary credibility, and sensitivity to real and nominal shocks.
- Few factors are robust determinants of pegging versus floating; larger countries seem to be much less likely to peg.

### Stylized facts and implications
- Virtually all countries that de facto peg their currencies to another currency have converged over the last fifty years to using either the U.S. dollar or the euro as anchors.
- Two main implications of strong network externalities:
  - Lock-in and potential suboptimality: snowball effects can create lock-in to a suboptimal anchor; an oversubscribed anchor currency could become overvalued.
  - Rapid geography shifts: changes by a small number of countries can have large and rapid effects on the geography of the international monetary system.
- Historical precedent: rapid disappearance of the British pound sterling as an anchor in the early 1970s despite prior 150-year international status.

### Data, measurement, and methodology
- De facto exchange rate regimes measured using the Reinhart and Rogoff (RR) classification because it:
  - Contains information on the anchor currency used for de facto pegs.
  - Is longitudinally complete, covering more than 150 countries over more than 40 years.
  - Uses information on parallel market exchange rates where appropriate.
  - Distinguishes “freely floating” from “freely falling” exchange rates.
- RR classification coded into a dataset available on the IMF website.
- Empirical approach: panel multinomial logit with country-year as unit of observation; categories include peg to the U.S. dollar, peg to the French franc, peg to the German mark, float, and freely fall.
- Payoff specification elements:
  - βA measures strength of network externalities.
  - tijt = share of GDP of country i’s trade with country j in year t.
  - Trade-weighted number of partners pegging to anchor A enters the payoff.
  - Vectors of regressors: xitk (anchor-specific characteristics), itly (regime-choice characteristics), tmz (anchor-specific characteristics such as 10-year average inflation level and variability).
- Float payoff normalized to 0; freely falling payoff specified as FallFallFall itkitkit k Uyeβ=+ ∑.
- Nested logit considered but multinomial logit retained; IIA tested by excluding anchors—no strong evidence against IIA.

### Empirical variables (groups A, B, C)
- Group A (country-specific determinants of anchor choice):
  - Trade network externalities (trade-weighted share of partners pegging to anchor).
  - Output co-movement: standard deviation of the difference of log growth rates of real output over previous fifteen years (country i vs. anchor country).
  - Currency denomination of liabilities: BIS data on total gross outstanding claims abroad denominated in anchor currencies, converted to U.S. dollars, normalized by nominal GDP.
  - Commodity composition of exports and regional/legal/colonial indicators.
- Group B (country-specific determinants of regime choice: peg vs. float/fall):
  - Trade openness: total imports and exports divided by PPP-adjusted GDP (real terms).
  - Capital account openness: total gross capital inflows and outflows divided by nominal GDP.
  - Reserves normalized by M2.
  - Financial development: proportion of M2 in total monetary stock.
  - Inflation history: indicator for past “high inflation” (entered freely falling category between current year and 1950).
  - Volatility measures: previous five-year volatility of investment/GDP (real shocks) and of velocity of money supply (nominal shocks).
  - Log real GDP and log population.
  - Lagged regime choice to capture persistence.
- Group C (anchor-specific determinants):
  - Historical 10-year average level of inflation in anchor-issuing country and standard deviation of annual average inflation over previous 10 years (no statistical relationship found).

### Results overview and model fit
- Baseline sample: 1990–1998 (currency denomination of liabilities available starting 1990).
- Longer sample: 1980–1998 (liabilities omitted).
- Overall model correctly predicts anchor choice over 86 percent of the time in baseline specifications.
  - Mark anchor predictions highest at 80 percent.
  - Dollar anchor predictions at 76 percent.
  - Franc anchor predictions at 56 percent.
- Model underpredicts counts for each anchor type and seriously underpredicts free falls.
- Time dummies jointly significant but do not materially change main coefficients.

### Determinants of anchor currency choice (empirical findings)
- Trade network externalities:
  - Out of six estimated trade-related coefficients, all are positive and four are statistically significant.
  - Trade relations with the mark bloc are always statistically significant.
  - Dollar trade flows can become insignificant depending on specification, but signs remain positive.
- Output co-movement (OCA prediction):
  - For mark anchors, increased co-movement of nominal output is consistently associated with higher propensity to adopt the mark anchor (statistically significant).
  - For dollar anchors, the co-movement variable is not consistently statistically significant.
  - The franc anchor coefficient on co-movement is opposite in sign to expectations.
- Currency denomination of liabilities:
  - More liabilities denominated in an anchor currency (normalized by GDP) increase likelihood of adopting that anchor (positive, statistically significant in specifications including liabilities).
- Persistence:
  - Having pegged to a particular anchor in the previous period increases probability of choosing that anchor again; past experience coefficients allow anchor-specific persistence comparisons.
- Regional and commodity effects:
  - Eastern European states show preference for mark anchors.
  - Sub-Saharan Africa and Middle East more likely to peg to the franc.
  - Primary commodity exporters (excluding oil) more likely to peg to the dollar in some specifications; petroleum exporters show complex/inconclusive results.

### Strength of network externalities and counterfactual simulations
- Counterfactual exercise scales trade with a given bloc to X percent of actual (X = 100, 50, 0) and predicts regime choice.
- Findings:
  - When half of trade with the dollar bloc dries up, the dollar bloc shrinks significantly.
  - When trade with the dollar bloc is completely reduced, the size of the predicted dollar bloc is almost half the actual bloc.
  - Adding trade to the mark bloc from the dollar bloc increases mark anchors substantially.
  - Regime choice is nonlinear in trade flows: moving from 50 to 0 percent of actual trade often yields a larger percentage reduction in dollar pegs than moving from 100 to 50 percent, suggesting a snowball effect as a bloc diminishes.

### Determinants of regime choice (pegs vs. floats)
- Larger economies are less likely to peg.
- Countries with greater volatility of real shocks are less likely to peg.
- Trade openness effects ambiguous across specifications (negative in Table 3, positive in Table 4).
- Financial development, reserves/M2, and capital account openness not robustly significant.
- Past hyperinflation predicts use of pegs (dollar and mark) in some specifications; past hyperinflation predicts free fall in other specifications.
- Strong evidence of persistence in regime choice; model better at predicting long-run patterns than sudden free falls.

### Robustness, endogeneity checks, and alternative measures
- Table 5: restricted choice set (dollar, franc, mark) — trade network coefficients positive and significant; liabilities positive and significant in Model 2.
- Table 6: 1998 cross-section with control function for endogeneity (instruments: log distance, log population, interaction of population and distance). Results indicate endogeneity may understate mark trade link effects; liability denomination remains positively related to anchor choice.
- Regional popularity (percentage of neighbors pegging to anchor) used as alternative measure—results consistent and sometimes more precisely estimated.
- Re-classifying pegs to exclude more flexible codes (fine code >= 8 excluded) leaves qualitative results intact.
- Including pound sterling as an anchor yields results showing sterling anchor associated with trade volume with sterling area for earlier periods.
- Excluding developed countries does not materially change determinants.
- Variables not included or hard to test: denomination of foreign currency deposits, political variables (data limited), degree of competition, invoicing practices, and pass-through effects.

### APPENDIX I: The natural classification (definitions, Table A1 codes)
- Reinhart and Rogoff natural classification: fifteen fine and six coarse categories based on monthly official and market-determined exchange rates for 1946-2001.
- Market-determined rate sources include Pick’s Currency Yearbook, Pick’s Black Market Yearbooks, Pick’s World Currency Report; official rates include IMF sources.
- Quotes are end-of-month exchange rates and are not subject to revisions.
- Table A1 codes and descriptions (fine — coarse — Description):
  - fine 1 — course 1 — Description: No separate legal tender
  - fine 2 — course 1 — Description: Pre announced peg or currency board arrangement
  - fine 3 — course 1 — Description: Pre announced horizontal band that is narrower than or equal to +/-2%
  - fine 4 — course 1 — Description: De facto peg
  - fine 5 — course 2 — Description: Pre announced crawling peg
  - fine 6 — course 2 — Description: Pre announced crawling band that is narrower than or equal to +/-2%
  - fine 7 — course 2 — Description: De factor crawling peg
  - fine 8 — course 2 — Description: De facto crawling band that is narrower than or equal to +/-2%
  - fine 9 — course 3 — Description: Pre announced crawling band that is wider than or equal to +/-2%
  - fine 10 — course 3 — Description: De facto crawling band that is narrower than or equal to +/-5%
  - fine 11 — course 3 — Description: Moving band that is narrower than or equal to +/-2% (i.e., allows for both appreciation and depreciation over time)
  - fine 12 — course 3 — Description: Managed floating
  - fine 13 — course 4 — Description: Freely floating
  - fine 14 — course 5 — Description: Freely falling
  - fine 15 — course 6 — Description: Dual market in which parallel market data is missing
- Observations where parallel market was known to be substantial but parallel rate data were not available were marked “unclassified.”

### Policy-relevant considerations and scenarios
- Because of potential lock-in effects, policy coordination among groups of countries could be required to achieve a collectively optimal anchor arrangement or to facilitate coordinated switches.
- Small changes in anchor choices by strategically important countries can trigger large reconfigurations of anchor currency usage globally; monitoring and evaluating such changes is important for anticipating shifts in trade patterns and reserve composition.
- Country size should be considered when evaluating incentives for pegging regimes or monetary unions given evidence that larger countries are less likely to peg.
- Practical considerations for regional monetary arrangements:
  - Account for trade-weighted network effects and currency denomination of liabilities.
  - Consider coordination mechanisms (e.g., simultaneous moves or agreements) to overcome path dependence and internalize network externalities.

*Source: _wp08132 - REFERENCES*

### References..............................................................................................................

### _wp08132 - References..............................................................................................................

### Major findings and contributions
- The paper documents the historical evolution of anchor currency choices and identifies key determinants explaining why countries peg to particular anchors.
- A panel multinomial logit approach is used to empirically analyze anchor currency choice.
- A key empirical result: trade network externalities are a primary determinant of anchor currency choice. Benefits of using a particular anchor increase with the amount of trade with countries using the same anchor, producing strong bandwagon or snowball effects.
- Other robust determinants of anchor choice identified:
  - The symmetry of output shocks.
  - The currency denomination of liabilities.
  - Past anchor choice (persistence): past anchor choice is an important determinant of future anchor choice.
- Determinants of pegging versus floating:
  - The authors test factors including trade and capital account openness, economic size, reserve cover, financial development, the need to import monetary credibility, and sensitivity to real and nominal shocks.
  - Few of these factors are robust determinants of pegging versus floating, although larger countries seem to be much less likely to peg.

### Stylized facts and implications
- Virtually all countries that de facto peg their currencies to another currency have converged over the last fifty years to using either the U.S. dollar or the euro as anchors.
- Two main implications of strong network externalities:
  - Lock-in and potential suboptimality: snowball effects can create lock-in to a suboptimal anchor currency; a group of countries may be locked into using a particular anchor because of initial random or idiosyncratic conditions even though a collective switch could be socially preferable. As a result, an oversubscribed anchor currency could become overvalued.
  - Rapid geography shifts: changes in anchor choices by a small number of countries can have large and rapid effects on the geography of the international monetary system. Example logic: if a few important countries abandon the U.S. dollar anchor, their trade partners may follow, causing the dollar to rapidly lose popularity and value.
- Historical precedent: the rapid disappearance of the British pound sterling as an anchor in the early 1970s despite its prior 150-year international status.

### Data, measurement, and methodology notes
- De facto exchange rate regimes are measured using the Reinhart and Rogoff (RR) classification because it:
  - Contains information on the anchor currency used for de facto pegs.
  - Is longitudinally complete, covering more than 150 countries over more than 40 years.
  - Uses information on parallel market exchange rates where appropriate.
  - Distinguishes “freely floating” from “freely falling” exchange rates (important to avoid confounding crisis-related free falls with genuine floats).
- The RR classification is coded into a dataset made available on the IMF website.
- Empirical approach: panel multinomial logit to explain anchor currency choice.
- The paper also provides an estimate of the strength of network externalities (estimation details and values are in later sections of the paper).

### Policy-relevant considerations and scenarios
- Because of potential lock-in effects, policy coordination among groups of countries could be required to achieve a collectively optimal anchor arrangement or to facilitate coordinated switches.
- Small changes in anchor choices by strategically important countries can trigger large reconfigurations of anchor currency usage globally; monitoring and evaluating such changes is important for anticipating shifts in trade patterns and reserve composition.
- Empirical evidence that larger countries are less likely to peg suggests that country size should be considered when evaluating incentives for pegging regimes or monetary unions.

*Italic: Source — IMF working paper content (excerpt).

### Appendix I summarizes the algorithm used to determine these

### _wp08132 - Appendix I summarizes the algorithm used to determine these

### Definitions and classification
- “Pegs” are defined as anything from a moving band that is narrower than +/– two percent to a country with no separate legal tender currency (i.e., anything from category 1 through 11 in Table A1 in Appendix I).
- “Floats” consist of either managed floating or freely floating regimes. “Freely falling regimes” are included as a separate category distinct from floating and pegging.
- The IMF moved to a de facto classification system in 1999; uncoded information is available from Reinhart and Rogoff (2003).

### Stylized facts on anchor currency choice (1950–2001; transition 1990–2001)
- Virtually all countries that peg have converged over the last fifty years to using either the U.S. dollar or the euro as their anchor currency.
- Regional and historical patterns:
  - Japan exhibited a long-standing de facto U.S. dollar anchor from 1949–1977; Japan’s financial market regulation until the end of the 1980s inhibited yen internationalization.
  - Between 1950 and 1972, the most popular anchors for developed countries were: U.S. dollar, British pound sterling, and German mark.
  - After the collapse of Bretton Woods, developed countries increasingly pegged to the German mark (linked to ERM and euro formation).
  - Developing countries: predominant anchors 1950–1972 were U.S. dollar, British pound, and French franc; post-Bretton Woods they largely switched to the U.S. dollar, while some former French colonies continued with the French franc.
  - Transition economies (post-Soviet): by 2001, seven transition countries anchored to the euro, eight (all CIS) anchored to the U.S. dollar, one pegged to the SDR (Latvia), five were freely floating, and two were freely falling.

- Examples of anchor choice motives:
  - Estonia anchored to the German mark/euro because close to 70 percent of Estonia’s foreign trade is with the EU.
  - East Caribbean Currency Authority switched from sterling to dollar in the 1970s due to increased trade with the United States, CARICOM peers pegging to the dollar, and declining trade with the UK.
  - West African Monetary Zone (WAMZ) debating dollar vs. euro or SDR given intent to merge with CFA franc zone.
  - SADC aims for common currency by 2018; some argue for a euro anchor due to stronger trade with euro area.
  - GCC planned common currency by 2010; initial dollar peg idea reconsidered in favor of euro/dollar basket or trade-weighted basket.
  - East Asia: historical dollar anchors, post-1997 more flexibility; debate about yen bloc vs. dollar/euro/yen basket.

### Conceptual framework: network externalities, multiple equilibria, path dependence
- Anchor choice modeled as minimizing transaction costs (bid-ask spreads, lost trade due to exchange rate uncertainty, hedging costs); equivalently, choose anchor minimizing trade-weighted sum of bilateral exchange rate volatilities.
- Network externalities arise because a country’s optimal anchor depends on trade partners’ anchors.
- Multiple equilibria can result: many equilibria exist corresponding to different dominant anchors when coordination benefits dominate inherent anchor qualities.
- Path dependence and coordination failure illustrated with payoff matrices:
  - Initial Payoff Matrix (example): yields unique dollar-dollar Nash equilibrium even if euro-euro would be Pareto superior for one player.
  - Subsequent Payoff Matrix (example): creates dollar and euro equilibria but path dependence may lock countries into dollar absent coordination.
- Historical parallels: dissolution of sterling bloc in the 1970s; possible coordination failures in former Soviet republics pegging to the dollar despite greater trade with euro area.

### Empirical methodology
- Multinomial logit framework with country-year as unit of observation; categories: peg to the U.S. dollar, peg to the French franc, peg to the German mark, float, and freely fall.
- Simultaneous modeling of (i) choice to peg vs. float/fall and (ii) anchor choice conditional on pegging.
- Payoff specification for country i and anchor A includes:
  - βA measures strength of network externalities.
  - tijt = share of GDP of country i’s trade with country j in year t.
  - Trade-weighted number of partners pegging to anchor A enters the payoff.
  - Residual eAit captures unobservables.
- Vectors of regressors:
  - xitk: K observed characteristics affecting anchor choice (e.g., liabilities denominated in currency A, symmetry of output shocks, past experience).
  - itly: L country-specific characteristics affecting choice to peg (e.g., economic size, openness, reserve cover, financial development).
  - tmz: M anchor-specific characteristics (e.g., level and variability of inflation in anchor issuer over previous ten years).
- Float payoff normalized to 0; freely falling payoff specified as FallFallFall itkitkit k Uyeβ=+ ∑.
- Coefficients on variables that determine value of pegging are constrained equal across anchor choices.
- Nested logit considered but multinomial logit retained; IIA tested by excluding anchors—no strong evidence against IIA.

### Empirical variables (groups A, B, C)
- Group A (country-specific determinants of anchor choice):
  - Trade network externalities (trade-weighted share of partners pegging to anchor).
  - Output co-movement: standard deviation of the difference of log growth rates of real output over previous fifteen years (country i vs. anchor country).
  - Currency denomination of liabilities: BIS data on total gross outstanding claims abroad denominated in anchor currencies, converted to U.S. dollars, normalized by nominal GDP.
  - Commodity composition of exports and regional/legal/colonial indicators.
- Group B (country-specific determinants of regime choice: peg vs. float/fall):
  - Trade openness: total imports and exports divided by PPP-adjusted GDP (real terms).
  - Capital account openness: total gross capital inflows and outflows divided by nominal GDP.
  - Reserves normalized by M2.
  - Financial development: proportion of M2 in total monetary stock.
  - Inflation history: indicator for past “high inflation” (entered freely falling category between current year and 1950).
  - Volatility measures: previous five-year volatility of investment/GDP (real shocks) and of velocity of money supply (nominal shocks).
  - Log real GDP and log population.
  - Lagged regime choice to capture persistence.
- Group C (anchor-specific determinants):
  - Historical 10-year average level of inflation in anchor-issuing country and standard deviation of annual average inflation over previous 10 years. (No statistical relationship found in the data.)

### Results overview (samples and key numeric periods)
- Baseline sample: 1990–1998 (currency denomination of liabilities available starting 1990).
- Longer sample: 1980–1998 (liabilities omitted).
- Tables reported: Tables 3–6 (results not reproduced here).
- Overall model correctly predicts anchor choice over 86 percent of the time in baseline specifications; mark anchor predictions highest at 80 percent, dollar 76 percent, franc 56 percent.

### Determinants of anchor currency choice (empirical findings)
- Trade network externalities matter:
  - Out of six estimated trade-related coefficients, all are positive and four are statistically significant.
  - Trade relations with the mark bloc are always statistically significant.
  - Dollar trade flows can become insignificant depending on specification, but signs remain positive.
- Output co-movement (OCA prediction):
  - For mark anchors, increased co-movement of nominal output is consistently associated with higher propensity to adopt the mark anchor (statistically significant).
  - For dollar anchors, the co-movement variable is not consistently statistically significant.
  - The franc anchor coefficient on co-movement is opposite in sign to expectations.
- Currency denomination of liabilities:
  - More liabilities denominated in an anchor currency (normalized by GDP) increase likelihood of adopting that anchor (positive, statistically significant in specifications including liabilities).
- Persistence:
  - Having pegged to a particular anchor in the previous period increases the probability of choosing that anchor again; past experience coefficients allow anchor-specific persistence comparisons.
- Regional and commodity effects:
  - Eastern European states show preference for mark anchors.
  - Sub-Saharan Africa and Middle East more likely to peg to the franc.
  - Primary commodity exporters (excluding oil) more likely to peg to the dollar in some specifications; petroleum exporters show complex/inconclusive results.

### Strength of network externalities and counterfactual simulations
- Counterfactual exercise: for each country, scale trade with a given bloc to X percent of actual (X = 100, 50, 0) and predict regime choice.
- Findings:
  - When half of trade with the dollar bloc dries up, the dollar bloc shrinks significantly; when trade with the dollar bloc is completely reduced, the size of the predicted dollar bloc is almost half the actual bloc.
  - Adding trade to the mark bloc from the dollar bloc increases mark anchors substantially.
  - Regime choice is nonlinear in trade flows: moving from 50 to 0 percent of actual trade often yields a larger percentage reduction in dollar pegs than moving from 100 to 50 percent, suggesting a snowball effect as a bloc diminishes.

### Determinants of regime choice (pegs vs. floats)
- Larger economies are less likely to peg.
- Countries with greater volatility of real shocks are less likely to peg.
- Trade openness effects ambiguous across specifications (negative in Table 3, positive in Table 4).
- Financial development, reserves/M2, and capital account openness not robustly significant.
- Past hyperinflation predicts use of pegs (dollar and mark) in some specifications; past hyperinflation predicts free fall in other specifications.
- Strong evidence of persistence in regime choice; model better at predicting long-run patterns than sudden free falls.

### Model fit, robustness and endogeneity checks
- Predictive performance:
  - Baseline model underpredicts counts for each anchor type and seriously underpredicts free falls.
  - Correct prediction rate for anchor choice exceeds 86 percent; mark anchors predicted correctly at 80 percent, dollar 76 percent, franc 56 percent.
- Robustness checks and alternative specifications:
  - Table 5: restricted choice set (dollar, franc, mark)—trade network coefficients positive and significant; liabilities positive and significant in Model 2.
  - Table 6: 1998 cross-section with control function for endogeneity (instruments: log distance, log population, interaction of population and distance). Findings indicate endogeneity may understate mark trade link effects; liability denomination remains positively related to anchor choice.
  - Time dummies jointly significant but do not change main coefficients materially.
  - Regional popularity (percentage of neighbors pegging to anchor) used as alternative measure—results consistent and sometimes more precisely estimated.
  - Re-classifying pegs to exclude more flexible codes (fine code >= 8 excluded) leaves qualitative results intact.
  - Including pound sterling as an anchor yields results showing sterling anchor associated with trade volume with sterling area for earlier periods.
  - Excluding developed countries does not materially change determinants.
- Variables not included or hard to test:
  - Denomination of foreign currency deposits (data limitations).
  - Political variables (tried Herfindahl index of political parties, ex post government stability, percent seats held by government—no significant results but data limited).
  - Degree of competition, invoicing practices, and pass-through effects are theoretically relevant but empirically daunting.

### Policy-relevant implications and scenarios
- Lock-in and coordination failure:
  - Network externalities can lock countries into a suboptimal equilibrium (dominant anchor may persist absent large crisis or coordinated action).
  - Suboptimal anchor use can lead to overvaluation of the anchor currency and unsustainably large current account deficits in the anchor-issuing country.
- Fragility and rapid transitions:
  - Small changes in anchor choice (e.g., falling demand for assets in an overvalued anchor currency) can trigger rapid, large changes in the geography of the international monetary system and potentially precipitate currency crises.
  - Historical precedent: collapse of silver/bimetallic standards in the 1870s and the sterling bloc in the 1970s.
- Practical considerations:
  - Trade integration and the currency denomination of liabilities are central to anchor decisions—policy discussions about regional monetary unions or anchor switches must account for trade-weighted network effects.
  - When designing regional monetary arrangements, consider coordination mechanisms to overcome path dependence and to internalize network externalities (e.g., simultaneous moves or agreements to shift anchor with sufficient critical mass).

*Source: _wp08132 - Appendix I summarizes the algorithm used to determine these (PDF chapter/section).*

### APPENDIX I: THE NATURAL CLASSIFICATION

### APPENDIX I: THE NATURAL CLASSIFICATION

### The data
- The Reinhart and Rogoff natural classification puts exchange rate regimes into fifteen fine and six coarse categories.
- The classification is based on monthly data on official and market-determined exchange rates for the period 1946-2001.
- The market-determined exchange rate data come from various issues of Pick’s Currency Yearbook, Pick’s Black Market Yearbooks, and Pick’s World Currency Report and the official rate comes from the same sources as well as from the IMF.
- The quotes are end-of-month exchange rates and are not subject to revisions.
- For the countries that had one or more monetary reforms, involving changes in the units in which the exchange rate is expressed, the data has been converted as necessary to ensure continuity.
- For more information see Rogoff et. al. (2004) and Reinhart and Rogoff (2004).

### Table A1. Regime Classification Codes and Descriptions
- fine 1 — course 1 — Description: No separate legal tender
- fine 2 — course 1 — Description: Pre announced peg or currency board arrangement
- fine 3 — course 1 — Description: Pre announced horizontal band that is narrower than or equal to +/-2%
- fine 4 — course 1 — Description: De facto peg
- fine 5 — course 2 — Description: Pre announced crawling peg
- fine 6 — course 2 — Description: Pre announced crawling band that is narrower than or equal to +/-2%
- fine 7 — course 2 — Description: De factor crawling peg
- fine 8 — course 2 — Description: De facto crawling band that is narrower than or equal to +/-2%
- fine 9 — course 3 — Description: Pre announced crawling band that is wider than or equal to +/-2%
- fine 10 — course 3 — Description: De facto crawling band that is narrower than or equal to +/-5%
- fine 11 — course 3 — Description: Moving band that is narrower than or equal to +/-2% (i.e., allows for both appreciation and depreciation over time)
- fine 12 — course 3 — Description: Managed floating
- fine 13 — course 4 — Description: Freely floating
- fine 14 — course 5 — Description: Freely falling
- fine 15 — course 6 — Description: Dual market in which parallel market data is missing

### Notes and classification cautions
- Observations where the parallel market was known to be substantial but parallel rate data were not available were marked “unclassified.” (Footnote 33)
- In some instances, the data for the market-determined rates are available for a shorter period. Observations where the parallel market was known to be substantial but parallel rate data were not available were marked “unclassified.” (Footnote 33 repeated in source)

*Source: APPENDIX I: THE NATURAL CLASSIFICATION*

### REFERENCES

### REFERENCES

### Exchange rate regimes, choice, and determinants
- Alesina, Alberto, and Alexander Wagner, 2006, “Choosing (and Reneging on) Exchange Rate Regimes.” Journal of the European Economics Association, Vol. 4, pp. 770–799.  
- Bubula, Andrea, and İnci,Ötker-Robe, 2002, “The Evolution of Exchange Rate Regimes Since 1990: Evidence From De Facto Policies,” IMF Working Paper 02/155 (Washington: International Monetary Fund).  
- Calvo, Guillermo A., and Carmen M., Reinhart, 2002, “Fear of Floating.” Quarterly Journal of Economics, Vol. 117 (2), pp. 379–408.  
- Dreyer, Jacob S., 1978, “Determinants of Exchange Rate Regimes for Currencies of Developing Countries: Some Preliminary Results.” World Development, Vol. 6, 437–445.  
- Edwards, Sebastian, 1996, “The Determinants of the Choice Between Fixed and Flexible Exchange-Rate Regimes.” NBER Working Paper No. 5756 (Cambridge, Massachusetts: MIT Press).  
- Ghosh, Atish, Anne-Marie Gulde, Jonathan Ostry, and Holger Wolf, 1997, “Does the Nominal Exchange Rate Regime Matter?” NBER Working Paper, No. 5874 (Cambridge, Massachusetts: MIT Press)  
- Heller, H. Robert, 1978, “Determinants of Exchange Rate Practices.” Journal of Money, Credit and Banking, Vol. 10, pp. 308–21.  
- Holden, Merle, Paul Holden, and Esther Suss, 1979, “The Determinants of Exchange Rate Flexibility: An Empirical Investigation.” Review of Economics and Statistics, Vol. 61 (3), pp. 327–333.  
- Juhn, Grace, Paolo Mauro, 2002,. “Long-Run Determinants of Exchange Rate Regimes: A Simple Sensitivity Analysis.” IMF Working Paper No. 02/104 (Washington:International Monetary Fund).  
- Masson, Paul, 2001, “Exchange Rate Regime Transitions.” Journal of Development Economics, Vol. 64 (2), pp. 571-586.  
- Poirson, Hélène, 2001, “How Do Countries Choose Their Exchange Rate Regime?” IMF Working Paper No. 01/46 (Washington: International Monetary Fund).  
- Rizzo, Jean-Marc, 1998, “The Economic Determinants of the Choice of an Exchange Rate Regime: A Probit Analysis.” Economics Letters, Vol. 59 (3), pp. 283–287.  
- Rogoff, Kenneth, Aasim Husain, Ashoka Mody, Robin Brooks, and Nienke Oomes, 2004. “Evolution and Performance of Exchange Rate Regimes.” IMF Working Paper No. 03/243. (Washington: International Monetary Fund).  
- Shambaugh, Jay C, 2004, “The Effect of Fixed Exchange Rates on Monetary Policy.” Quarterly Journal of Economics, Vol. 119 (1), pp. 301–352.  
- Savvides, Andreas, 1990, “Real Exchange Rate Variability and the Choice of Exchange Rate Regime by Developing Countries.” Journal of International Money and Finance, Vol.9, pp. 440–454.  
- Veyrune, Romain, 2007, “Fixed Exchange Rates and the Autonomy of Monetary Policy: The Franc Zone Case.” IMF Working Paper No. 07/34. (Washington: International Monetary Fund).  

### Currency unions, monetary integration, and optimum currency areas
- Bayoumi, Tamim, and Barry Eichengreen, 1999, “Is Asia an Optimum Currency Area? Can It Become One? Regional, global and historical perspectives on Asian monetary relations.” In: Exchange Rate Policies in Emerging Asian Countries. Routledge. Collignon, Stefan, Jean Pisani-Ferry, and Yung Chul Park, eds., London, pp. 347–365.  
- Bayoumi, Tamim, and Barry Eichengreen, 1997, “Ever Closer to Heaven? An Optimum Currency Area Index for European Countries.” European Economic Review Papers and Proceedings, Vol.41, pp. 761–70.  
- Fasano, Ugo, and Andrea Schaechter, 2003, Monetary Union Among Member Countries of the Gulf Cooperation Council. IMF Occasional Paper No. 223 (Washington: International Monetary Fund).  
- Kenen, Peter B., and Ellen E. Meade, 2006, “Monetary Integration in East Asia.” In: Regional Monetary Integration, Kenen, Peter B., and Ellen E. Meade, eds. Cambridge University Press, New York.  
- McKibbin, Warwick J., and Hong-Giang Lee, 2004, “Which Exchange Rate Regime for Asia?” Brookings Discussion Papers in International Economics, No. 158, Washington, D.C.  
- Tavlas, George S., and Yuzuri Ozeki, 1992, The Internationalization of Currencies: An Appraisal of the Japanese Yen, IMF Occasional Paper No. 90 (Washington: International Monetary Fund).  
- WAMI News, 2002, European Central Bank and WAMI Hold Workshop on Monetary Union in West Africa 10-15, April. West African Monetary Institute, Accra.  
- WAMI News, 2003, Preliminary Study Report on Banking Supervision in the WAMZ 10–11, August. West African Monetary Institute, Accra.  
- Yehoue, Etienne B., 2004, “Currency Bloc Formation as a Dynamic Process Based on Trade Network Externalities,” IMF Working Paper No. 04/222 (Washington: International Monetary Fund).  
- Yehoue, Etienne B., 2006, “On the Pattern of Currency Blocs in Africa,” Journal of African Development, Volume 1, No 1, pp. 39–86.  
- Masson, Paul, and Catherine Pattillo, 2005, The Monetary Geography of Africa (Washington: Brookings Institution Press).  

### Trade, reserves, and international monetary system
- Eichengreen, Barry, and Donald J. Mathieson, 2000, “The Currency Composition of Foreign Exchange Reserves: Retrospect and Prospect.” IMF working paper No. 00/131 (Washington: International Monetary Fund).  
- Eichengreen, Barry, 2004, “Global Imbalances and the Lessons of Bretton Woods.” NBER Working Paper No. 10497 (Cambridge, Massachusetts: MIT Press).  
- Frankel, Jeffrey A., and David Romer, 1999, “Does Trade Cause Growth?” The American Economic Review, Vol. 89 (3), pp. 379–399.  
- Glick, Reuven, and Andrew K. Rose, 2002, “Does a Currency Union Affect Trade? The Time-Series Evidence.” European Economic Review, Vol. 46 (6), pp. 1125–1151.  
- Krugman, Paul, 1984, “The International Role of the Dollar: Theory and Prospect.” In: Exchange Rate Theory and Practice, Bilson, John F.O., and Richard C. Marston, eds., National Bureau of Economic Research and University of Chicago Press, Chicago, pp. 261–280.  
- Obstfeld, Maurice, and Kenneth Rogoff, 2004, “The Unsustainable U.S. Current Account Position Revealed.” NBER Working Paper, No. 10869 (Cambridge, Massachusetts: MIT Press)  
- Ogawa, Eiji, and Takatoshi Ito, 2000, “On the Desirability of a Regional Currency Basket.” NBER Working Paper No. 8002 (Cambridge, Massachusetts: MIT Press).  
- Klein, Michael W., and Jay C. Shambaugh, 2006, “Fixed Exchange Rates and Trade.” Journal of International Economics, Vol. 70, pp. 359–383.  

### Historical and institutional perspectives
- Camdessus, Michel, 1995. The Dollar, The Yen and European Currencies. Address at the XIV Sesiones de Trabajo de Tesoreria, Caja de Ahorros de Navarra, Pamplona, Spain, November 17, 1995. International Monetary Fund, Washington, DC.  
- Eichengreen, Barry, and Marc Flandreau, 1998. “The Geography of the Gold Standard.” In: Currency Convertibility: The Gold Standard and Beyond. Braga de Macedo, Jorge, Barry Eichengreen, and Jaime Reis, eds. Routledge, London, pp. 113–143.  
- Flandreau, Marc, 1996, “The French Crime of 1873: An Essay in the Emergence of the International Gold Standard, 1870-1880.” Journal of Economic History, Vol. 56 (4), pp. 862-897.  
- Meissner, Christopher M., 2005, “A New World Order: Explaining the International Diffusion of the Gold Standard, 1870-1913.” Journal of International Economics, Vol. 66, pp. 385–406.  
- Obstfeld, Maurice, and Alan M. Taylor, 1998, “The Great Depression as a Watershed: International Capital Mobility in the Long Run.” In: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Bordo, Michael, Claudia, D. Goldin, and Eugene N. White, eds. University of Chicago Press, Chicago.  
- Reinhart, Carmen, and Kenneth Rogoff, 2004, “The Modern History of Exchange Rate Arrangements: A Reinterpretation.” Quarterly Journal of Economics, Vol. 119 (1), pp. 1–48.  
- Reinhart, Carmen, and Kenneth Rogoff, 2003, “The Country Chronologies and Chartbook. Background Material to A Modern History of Exchange Rate Arrangements: A Reinterpretation. Part I”. Available via the Internet: http://www.publicpolicy.umd.edu/faculty/reinhart/PartI_Chronologies.pdf

### Political economy, institutions, and dynamics
- Bernhard, William, and David Leblang, 1999, “Democratic Institutions and Exchange-rate Commitments.” International Organization, Vol. 53(1), pp. 71–97.  
- Beck, Nathaniel, David, Epstein, Simon Jackman, and Sharyn O’ Halloran, 2002, “Alternative Models of Dynamics in Binary Time-Series-Cross Section Models: The Example of State Failure.” Unpublished working paper, Stanford University, Palo Alto, California.  
- __________, Jonathan Katz, and Richard Tucker, 1998, “Taking Time Seriously: Time-Series–Cross-Section Analysis with a Binary Dependent Variable.” American Journal of Political Science, Vol. 42 (4), pp. 1260–1288.  
- Beck, Thorsten, George Clarke, Alberto Groff, Philip Keefer, and PatrickWalsh, 2001, “New Tools in Comparative Political Economy: The Database of Political Institutions.” World Bank Economic Review, Vol. 15 (1), pp.165–176.  
- Frieden, Jeffry, Piero Ghezzi, and Ernesto Stein, 2005, “Politics and Exchange Rates: A Cross-Country Approach to Latin America.” Journal of Applied Economics, Vol. 8 (2), pp. 203–225.  
- Hausmann, Ricardo, Ugo Panizza, Ernesto Stein, 2001, “Why Do Countries Float the Way They Float?” Journal of Development Economics, Vol. 66, pp. 387–414.  
- Worrell, DeLisle, Dona Marshall, and Nicole Smith, 2000, “The Political Economy of Exchange Rate Policy in the Caribbean.” Inter-American Development Bank Working Paper Vo. R-401, Washington, D.C.  

### Theory, networks, and microfoundations
- Arthur, W. Brian, 1989, “Competing Technologies, Increasing Returns, and Lock-In by Historical Events.” Economic Journal, Vol. 99, pp. 116–131.  
- Ben-Akiva, Moshe E., and Cristian Angleo Guevara, 2006, “Endogeneity in Residential Location Choice Models.” Transportation Research Record: Journal of the Transportation Research Board No. 1977, pp. 60–66.  
- Dowd, Kevin, and David Greenaway, 1993, “Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimum Currency Areas.” Economic Journal, Vol. 103 (127), pp. 1180–1189.  
- Kiyotaki, Nobuhiro, and Randall Wright, 1989, “On Money as a Medium of Exchange.” Journal of Political Economy, Vol. 97 (4), pp. 927–954.  
- Krugman, Paul, 1979, “A model of balance of payments crises.” Journal of Money, Credit, and Banking, Vol. 11, pp. 311–325.  
- Kouri, Pentti J.K., Braga de Macedo, Jorge, 1978. Exchange Rates and the International Adjustment Process, Brookings Papers on Economic Activity, 1, 111-1150.  
- Levy-Yeyati, Eduardo, and Federico Sturzenegger, 2003. “A De Facto Classification of Exchange Rate Regimes: A Methodological Note.” American Economic Review, Vol. 93 (4). Available at http://www.aeaweb.org/aer/contents  
- Levy-Yeyati, Eduardo, Federico Sturzenegger, and Eliana Reggio, 2003, “On the Endogeneity of Exchange Rate Regimes.” Unpublished Working Paper Universidad Torcuato di Tella, Argentina.  
- Maddala, G. S., 1987, “Limited Dependent Variable Models Using Panel Data.” The Journal of Human Resources, Vol. 22 (3), pp. 305–338.  
- Kwan, C.H, 1994, “Economic Interdependence in the Asia-Pacific Region: Towards a yen Bloc.” The Brookings Institution and Routledge, New York.  
- Kwan, C.H, 2001, “Yen Bloc: Toward Economic Integration in East Asia.” The Brookings Institution and Routledge, New York  

### Regional case studies and speeches
- Dornbusch, Rudiger, and Yung Chul Park, 1999, “Flexibility or Nominal Anchors?” In: Exchange Rate Policies in Emerging Asian Countries. Collignon, Stefan, Jean, Pisani-Ferry, and Yung Chul Park, eds., Routledge, London, pp. 3-34.  
- Frankel, Jeffrey A., 2003, “Experience of and Lessons from Exchange Rate Regimes in Emerging Economies.” NBER Working Paper No. 10032. (Cambridge, Massachusetts: MIT Press).  
- Kouri, Pentti J.K., Braga de Macedo, Jorge, 1978. Exchange Rates and the International Adjustment Process, Brookings Papers on Economic Activity, 1, 111-1150.  
- Kraft, Vajur, 1999, “Why a Fixed Rate and the CB?” Speech given at Helsinki Seminar on the Accession Process. Available via the Internet : http://213.180.8.164/pub/en/dokumendid/publikatsioonid/seeriad/koned/varasem/_19 98-1999/ar9911102.html?objId=963338  
- Ogawa, Eiji, and Takatoshi Ito, 2000, “On the Desirability of a Regional Currency Basket.” NBER Working Paper No. 8002 (Cambridge, Massachusetts: MIT Press).  
- Fasano, Ugo, and Andrea Schaechter, 2003, Monetary Union Among Member Countries of the Gulf Cooperation Council. IMF Occasional Paper No. 223 (Washington: International Monetary Fund).  

*Source: _wp08132 - REFERENCES*

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