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The role of financial development in exchange rate regime choices

  • Lin, Shu
  • Ye, Haichun

We make the first attempt in the literature to empirically investigate the role of financial development in the choice of exchange rate regimes. Using a binary choice model, we first show that financially less developed countries are more likely to adopt a fixed exchange rate. To further examine the impact of financial development on the conditional probability of exiting from an existing pegged system to a flexible one, we then employ hazard-based duration analysis. We find strong evidence that countries with higher levels of financial development are more likely to exit a pegged system, and, interestingly, financial development only matters to orderly exits but not disorderly exits. Our results are robust to controlling for endogeneity and sample selection.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 4 (June)
Pages: 641-659

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:4:p:641-659
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