Democracy and exchange rate regime choice

This paper takes a new look at the relationship between democracy and exchange rate regimes. Evidence from a cluster analysis and a panel analysis suggests that democracies are not all equally likely to float their exchange rates. While democracies are more likely to float than autocracies are, established democracies are more likely to choose a fixed exchange rate regime because they are better able than transition democracies to make the credible commitments needed for a cooperative arrangement. More established democracies are more able to join cooperative arrangements that allow them to make a less constrained choice between floating and fixing.