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Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice

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  • Christopher Meissner

    (University of Cambridge)

  • Nienke Oomes

    (International Monetary Fund)

Abstract

Conditional on choosing a pegged exchange rate regime, what determines the currency to which countries peg or “anchor” their exchange rate? This paper aims to answer this question using a panel multinomial logit framework, covering more than 100 countries for the period 1980-1998. We find that trade network externalities are a key determinant of anchor currency choice, implying that there are multiple steady states for the distribution of anchor currencies in the international monetary system. Other factors found to be related to anchor currency choice include the symmetry of output co-movement, the currency denomination of debt, and legal or colonial origins.

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Paper provided by ESRC World Economy and Finance Research Programme, Birkbeck, University of London in its series WEF Working Papers with number 0009.

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Date of creation: Mar 2006
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Handle: RePEc:wef:wpaper:0009

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