HOW DO MACROECONOMIC AND POLITICAL VARIABLES AFFECT THE FLEXIBILITY OF EXCHANGE RATE REGIME?

Year 2009, Volume: 9 Issue: 2, 823 - 835, 01.05.2009

Mehmet Güçlü

Abstract

The choice of exchange rate regime has become one of the most important issues once more in many economies after the financial crises in recent years. In the wake of the financial crises, many countries, especially emerging market economies, opted for floating exchange rate regimes by forsaking the pegged regimes. Consequently, an old debate on the choice and determinants of exchange rate regimes has been triggered. Economists have started to debate what appropriate exchange rate regime for an economy is. When the tendency in recent years is taken into consideration, the choice of exchange rate regime of the countries, especially emerging economies, needs to be analyzed. To do this, in this paper, we attempt to uncover how emerging market economies choose their exchange rate regimes. In other words, we try to find the economic and political factors underlying the choice of exchange rate regimes. The study includes 25 emerging market economies over the period 1970-2006. We use random effect ordered probit model in order to find the long run economic and political determinants of exchange rate regimes for emerging economies. The determinants of both the de jure and de facto exchange regimes are empirically analyzed in the paper

Keywords

Exchange Rate Regime, Emerging Market

References

• Berger, H., Sturm, J.-E., and De Haan, J., (2000), “An Empirical Investigation into Exchange Rate Regime Choice and Exchange Rate Volatility”, CESifo Working Paper; No. 263.
• Bernhard, W., and Leblang, D. (1999), “Democratic Institutions and Exchangerate Commitments”, International Organization, 53 (1): 71-97.
• Bleaney, M., and Francisco, M. (2005), “The Choice of Exchange Rate Regime: How Valid is the Binary Model?”, CREDIT research paper, No: 05/02. 832 HOW DO MACROECONOMIC AND POLITICAL VARIABLES AFFECT THE FLEXIBILITY OF EXCHANGE RATE REGIME?
• Calvo, G. A., and C. M. Reinhart (2000), “Fear of Floating”, NBER Working Paper, No: 7993.
• Collins, Susan M., (1996), “On Becoming More Flexible: Exchange Rate Regimes in Latin America and the Caribbean,” Journal of Development Economics, 51: 117–38.
• Dreyer, Jacob S., (1978), “Determinants of Exchange Rate Regimes for Currencies of Developing Countries: Some Preliminary Results,” World Development, 6: 437–45.
• Edwards, S. (1996). "The Determinants of the Choice Between Fixed and Flexible Exchange Rate Regimes", NBER Working Paper, No: 5756.
• Edwards, S. (1998), “Exchange Rate Anchors and Inflation: A Political Economy Approach”, In: Eijffinger, S., Huizinga, H. (Eds.), Positive Political Economy: Theory and Evidence,. Cambridge University Press, Cambridge.
• Ghosh, A.R., Gulde, A.-M., and Ostry, J., Wolf, H. (1997), “Does the Nominal Exchange Rate Matter?”, NBER Working Paper, No: 5874.
• Heller, H.R. (1978), Determinants of Exchange Rate Practices, Journal of Money, Credit, and Banking, 10: 308-321.
• Holden P., M. Holden, and E. Suss, (1979), “The Determinants of Exchange Rate Flexibility: An Empirical Investigation," Review of Economics and Statistics, 61: 327-33.
• Honkapohja, S., and Pikkarainen, P. (1994), “Country Characteristics and the Choice of the Exchange Rate Regime: Are Mini-Skirts Followed by Maxis?” in Exchange Rate Policies in the Nordic Countries, ed. by Johnny Åkerholm and Alberto Giovannini (London: Centre for Economic Policy Research).
• IMF, various issues, (1996-2006), Annual Reports (International Monetary Fund: Washington DC)
• Juhn, G., and Mauro, P., (2002), “Long-run Determinants of Exchange Rate Regimes: A Simple Sensitivity Analysis”, IMF Working Paper, No: 02/104.
• Kato, I., and Uctum, M. (2005), Choice of Exchange Rate Regime and Currency Zones. http://userhome.brooklyn.cuny.edu/economics/muctum/WP.htm
• Levy-Yeyati, E., Sturzenegger, F. (1999) Classifying Exchange Rate Regimes: Deeds vs. Words, http://ideas.repec.org/a/eee/eecrev/v49y2005i6p1603-1635.html
• Levy-Yeyati, E., and Sturzenegger, F. (2005), “Classifying Exchange Rate Regimes: Deeds vs. Words”, European Economic Review, 49 (6): 1603-1635. 833 Mehmet GÜÇLÜ
• Levy-Yeyati, E., and Sturzenegger, F., and Iliana, R. (2007), “On the Endogeneity of Exchange Rate Regimes”, http://ideas.repec.org/p/udt/wpbsdt/veintiuno.html
• Markiewicz, A. (2006), “Choice of Exchange Rate Regime in Central and Eastern European Countries: An Empirical Analysis”, Center for Economic Studies Working Paper.
• Melvin, M., (1985), “The Choice of An Exchange Rate System and Macroeconomic Stability”, Journal of Money, Credit, and Banking ,17 (4): 467- 478.
• Meon, P.-G., and Rizzo, J.-M. (2002), “The Viability of Fixed Exchange Rate Commitments: Does Politics Matter? A Theoretical and Empirical Investigation.”, Open Economies Review, 13 (2): 111-132.
• Papaioannou, M. C. (2003), “Determinants of the Choice of Exchange Rate Regimes in Six Central American Countries: An Empirical Analysis”, IMF Working Paper, No: 03/59.
• Poirson, H. (2001), “How Do Countries Choose Their Exchange Rate Regime?”, IMF Working Paper, No: 01/46.
• Prasad, E. S., Rogoff, K., Wei, S. and Kose, M. A. (2003), “Effects of Financial Globalization on Developing Countries: Some Empirical Evidence”, IMF, http://www.nber.org/~wei/data.html
• Reinhart, C., and Rogoff, K. S., (2003), “The Modern History of Exchange Rate Arrangements: A Reinterpretation”, http://www.wam.umd.edu/~creinhar/Papers.html
• Rizzo, J.-M., (1998), “The Economic Determinants of the Choice of an Exchange Rate regime: a Probit Analysis”, Economics Letters, 59: 283-287.
• Savvides, A. (1990), “Real Exchange Rate Variability and the Choice of Exchange Rate Regime by Developing Countries,” Journal of International Money and Finance, 9: 440–54.
• Von Hagen, J., and Zhou, J. (2007), “The Choice of Exchange Rate Regimes in Developing Countries: A multinomial Panel Analysis”, Journal of International Money and Finance, 26: 1071-1094.
• Von Hagen, J., Zhou, J., (2005), “The Choice of Exchange Rate Regimes: An Empirical Analysis for Transition Economies”, Economics of Transition, 13 (4): 679-703.
• Zhou, J. (2003), “The Choice of Exchange Rate Regimes in Developing Countries: A Multinomial Panel Probit Analysis”. http://ideas.repec.org/p/cpr/ceprdp/.htm