How Do Countries Choose their Exchange Rate Regime?

IMF Working Papers, May 1, 2001

Source details

Study scope: 93 countries during 1990-98.
Main analytical approach: cross-country analysis of variations in international reserves and nominal exchange rates; regression analysis of regime choice.
Key empirical distinctions:
- (i) truly fixed pegs and independent floats differ significantly from other regimes
- (ii) significant discrepancies exist between de jure and de facto flexibility

Fixed pegs and independent floats are empirically distinct from other exchange rate arrangements based on observed variations in international reserves and nominal exchange rates.
There are significant discrepancies between de jure classifications of exchange rate regimes and de facto exchange rate flexibility.

Political factors:
- political instability
- government temptation to inflate
Reserve adequacy:
- variations in international reserves influence regime choice
Currency substitution:
- dollarization (currency substitution)
Exchange rate risk:
- exchange rate risk exposure
Optimal currency area criteria and capital movements:
- some traditional optimal currency area criteria matter, in particular capital mobility
The regressions highlight the combined influence of the above factors on exchange rate regime selection.

Hélène Poirson, "How Do Countries Choose their Exchange Rate Regime?", May 1, 2001.

How Do Countries Choose Their Exchange Rate Regime? - WP/01/46
- How Do Countries Choose Their Exchange Rate Regime? - WP/01/46 (Markdown version)
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