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Fear of Floating and Fear of Pegging: An Empirical Analysis of De Facto Exchange Rate Regimes in Developing Countries

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  • von Hagen, Jürgen
  • Zhou, Jizhong

Abstract

This paper uses a panel probit model with simultaneous equations to explain the joint determination of de facto and de jure exchange rate regimes in developing countries since 1980. We also derive an ordered-choice panel probit model to explain the causes of discrepancies between the two regime choices. Both models are estimated using simulation-based maximum likelihood methods. The results of the simultaneous equations model suggest that the two regime choices are dependent of each other and exhibit considerable state dependence. The ordered probit model provides evidence that regime discrepancies reflect an error-correction mechanism, and the discrepancies are persistent over time.

Suggested Citation

  • von Hagen, Jürgen & Zhou, Jizhong, 2006. "Fear of Floating and Fear of Pegging: An Empirical Analysis of De Facto Exchange Rate Regimes in Developing Countries," CEPR Discussion Papers 5530, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5530
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    References listed on IDEAS

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    1. von Hagen, Jurgen & Zhou, Jizhong, 2005. "De facto and official exchange rate regimes in transition economies," Economic Systems, Elsevier, vol. 29(2), pages 256-275, June.
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    3. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
    5. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, April.
    6. Masson, Paul R., 2001. "Exchange rate regime transitions," Journal of Development Economics, Elsevier, vol. 64(2), pages 571-586, April.
    7. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
    8. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-959, July.
    9. Jürgen von Hagen & Jizhong Zhou, 2005. "The choice of exchange rate regime: "An empirical analysis for transition economies" ," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(4), pages 679-703, October.
    10. 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.
    11. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
    12. repec:idb:wpaper:418 is not listed on IDEAS
    13. Helene Poirson Ward, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
    14. Holden, Paul & Holden, Merle & Suss, Esther C, 1979. "The Determinants of Exchange Rate Flexibility: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 327-333, August.
    15. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
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    Cited by:

    1. Jurgen Von Hagen & Jizhong Zhou, 2008. "The interaction between capital controls and exchange rate regimes: evidence from developing countries," International Economic Journal, Taylor & Francis Journals, vol. 22(2), pages 163-185.
    2. Hans Keiding & Mette J. Knudsen, 2005. "Rational Fear of Floating: A Simple Model of Exchange Rates and Income Distribution," Discussion Papers 05-03, University of Copenhagen. Department of Economics.
    3. von Hagen, Jurgen & Zhou, Jizhong, 2007. "The choice of exchange rate regimes in developing countries: A multinomial panel analysis," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1071-1094, November.

    More about this item

    Keywords

    de facto exchange rate regimes; developing countries; simulated maximum likelihood; simultaneous equations model;

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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