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Country Characteristics and the Choice of the Exchange Rate Regime: Are Mini-skirts Followed by Maxis?

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  • Honkapohja, Seppo
  • Pikkarainen, Pentti

Abstract

We use a sample of 140 countries to study empirically how a country's characteristics are associated with its choice of an exchange rate regime. When countries are classified according to their current exchange rate arrangements, we observe that small countries with low diversification of exports are the most likely candidates to peg their exchange rates. Other country characteristics, such as the level of development, openness of the real or financial sector, geographical diversification of exports, and fluctuations in the terms of trade, have hardly any power to explain the choice of an exchange rate system. Somewhat surprisingly, it is developing countries which have moved towards more flexible exchange rate practices during the last ten years, while countries with well diversified exports have adopted more rigid exchange rate arrangements. The regression results predict that Italy, Spain and the United Kingdom should have floating exchange rates, while Israel, New Zealand and Switzerland should adopt a more rigid exchange rate regime. Finland should adopt a regime of limited flexibility (such as the EMS) rather than peg to a basket or float.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 744.

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Date of creation: Dec 1992
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Handle: RePEc:cpr:ceprdp:744

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Related research

Keywords: Developing Countries; EMS; Exchange Rate Regime; Export Diversification;

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Cited by:
  1. Chee-Heong Quah & Patrick M. Crowley, 2012. "China and the Dollar: An Optimum Currency Area View," Prague Economic Papers, University of Economics, Prague, vol. 2012(4), pages 391-411.
  2. Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004. "Evolution and Performance of Exchange Rate Regimes," IMF Occasional Papers 229, International Monetary Fund.
  3. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Economic Structure and the Decision to Adopt a Common Currency," Center for International and Development Economics Research, Working Paper Series qt0bw0h379, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  4. von Hagen, Jürgen & Zhou, Jizhong, 2004. "The Choice of Exchange Rate Regime in Developing Countries: A Multinational Panel Analysis," CEPR Discussion Papers 4227, C.E.P.R. Discussion Papers.
  5. BEN ALI Mohamed Sami, 2006. "Capital Account Liberalization And Exchange Rate Regime Choice, What Scope For Flexibility In Tunisia?," William Davidson Institute Working Papers Series wp815, William Davidson Institute at the University of Michigan.
  6. Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange rate volatility and intervention: implications of the theory of optimum currency areas," Journal of International Economics, Elsevier, vol. 45(2), pages 191-209, August.
  7. Barry Eichengreen, 2000. "Does Mercosur Need a Single Currency?," International Finance 0003006, EconWPA.
  8. repec:prg:jnlpep:v:2013:y:2013:i:4:id:431:p:391-411 is not listed on IDEAS
  9. Paolo Mauro & Grace Juhn, 2002. "Long-Run Determinants of Exchange Rate Regimes," IMF Working Papers 02/104, International Monetary Fund.
  10. Pierre-Guillaume Méon & Jean-Marc Rizzo, 2002. "The Viability of Fixed Exchange Rate Commitments: Does Politics Matter? A Theoretical and Empirical Investigation," Open Economies Review, Springer, vol. 13(2), pages 111-132, April.
  11. Frankel, Jeffrey, 2008. "Should Eastern European Countries Join the Euro? A Review and Update of Trade Estimates and Consideration of Endogenous OCA Criteria," Working Paper Series rwp08-059, Harvard University, John F. Kennedy School of Government.
  12. Michael Artis, 1993. "The Role of the Exchange Rate in Monetary Policy - the Experience of Other Countries," RBA Annual Conference Volume, in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia.
  13. Honohan, Patrick, 1993. "An Examination of Irish Currency Policy," Research Series, Economic and Social Research Institute (ESRI), number PRS18.
  14. Lars Einar Legernes & Erling Vardal, 2000. "From Fixers to Floaters: An Empirical Analysis of the Decline in Fixed Exchange Rate Regimes 1973-1995," Econometric Society World Congress 2000 Contributed Papers 1754, Econometric Society.
  15. Frankel, Jeffrey, 2004. "Real Convergence and Euro Adoption in Central and Eastern Europe: Trade and Business Cycle Correlations as Endogenous Criteria for Joining EMU," Working Paper Series rwp04-039, Harvard University, John F. Kennedy School of Government.

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