Exchange Rate Regime Choice and Currency Crises

This paper aims to fill the gap between exchange rate regime choice and currency crises literatures. Through explicitly taking into account the exchange rate regime choice of countries in explaining the occurrence of currency crisis, it is tempting to think that sources of vulnerabilities, eventually leading countries to crises, might be different according to the exchange rate regime adopted by a country. This paper contributes to the empirical literature by assessing whether currency crises have regime-specific features. We propose a way to transform the variables exhibiting regime-specific features to solve the problems encountered in the empirical literature. Our regression results suggest that the odds of a crisis increase significantly in countries where chosen regimes are inconsistent with their features. In addition to standard macroeconomic indicators, countries’ regime choice should also consider what is being imposed by the natural determinants of the regime choice. Our sample consists of 163 developed and developing countries and covers the period from 1990 to 2007.