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Country Characteristics and the Choice of the Exchange Rate Regime: Are Mini-skirts Followed by Maxis?

Author

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  • Honkapohja, Seppo
  • Pikkarainen, Pentti

Abstract

We use a sample of 140 countries to study empirically how a country's characteristics are associated with its choice of an exchange rate regime. When countries are classified according to their current exchange rate arrangements, we observe that small countries with low diversification of exports are the most likely candidates to peg their exchange rates. Other country characteristics, such as the level of development, openness of the real or financial sector, geographical diversification of exports, and fluctuations in the terms of trade, have hardly any power to explain the choice of an exchange rate system. Somewhat surprisingly, it is developing countries which have moved towards more flexible exchange rate practices during the last ten years, while countries with well diversified exports have adopted more rigid exchange rate arrangements. The regression results predict that Italy, Spain and the United Kingdom should have floating exchange rates, while Israel, New Zealand and Switzerland should adopt a more rigid exchange rate regime. Finland should adopt a regime of limited flexibility (such as the EMS) rather than peg to a basket or float.

Suggested Citation

  • Honkapohja, Seppo & Pikkarainen, Pentti, 1992. "Country Characteristics and the Choice of the Exchange Rate Regime: Are Mini-skirts Followed by Maxis?," CEPR Discussion Papers 744, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:744
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    Cited by:

    1. Frankel, J-A & Rose, A-K, 1996. "Economic Structure and the Decision to Adopt a Common Currency," Papers 611, Stockholm - International Economic Studies.
    2. Frankel, Jeffrey, 2004. "Real Convergence and Euro Adoption in Central and Eastern Europe: Trade and Business Cycle Correlations as Endogenous Criteria for Joining EMU," Working Paper Series rwp04-039, Harvard University, John F. Kennedy School of Government.
    3. Barry Eichengreen., 1993. "International Monetary Arrangements for the 21st Century," Center for International and Development Economics Research (CIDER) Working Papers C93-021, University of California at Berkeley.
    4. Honohan, Patrick, 1993. "An Examination of Irish Currency Policy," Research Series, Economic and Social Research Institute (ESRI), number PRS18.
    5. Kotilainen, Markku, . "Exchange Rate Unions: A Comparison with Currency Basket and Floating Rate Regimes," ETLA A, The Research Institute of the Finnish Economy, number 21.
    6. Barry Eichengreen, 1998. "Does Mercosur Need a Single Currency," NBER Working Papers 6821, National Bureau of Economic Research, Inc.
    7. Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
    8. Frankel, Jeffrey, 2008. "Should Eastern European Countries Join the Euro? A Review and Update of Trade Estimates and Consideration of Endogenous OCA Criteria," Working Paper Series rwp08-059, Harvard University, John F. Kennedy School of Government.
    9. BEN ALI Mohamed Sami, 2006. "Capital Account Liberalization And Exchange Rate Regime Choice, What Scope For Flexibility In Tunisia?," William Davidson Institute Working Papers Series wp815, William Davidson Institute at the University of Michigan.
    10. Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange rate volatility and intervention: implications of the theory of optimum currency areas," Journal of International Economics, Elsevier, vol. 45(2), pages 191-209, August.
    11. Chee-Heong Quah & Patrick M. Crowley, 2012. "China and the Dollar: An Optimum Currency Area View," Prague Economic Papers, University of Economics, Prague, vol. 2012(4), pages 391-411.
    12. Michael Artis, 1993. "The Role of the Exchange Rate in Monetary Policy - the Experience of Other Countries," RBA Annual Conference Volume,in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia.
    13. von Hagen, Jürgen & Zhou, Jizhong, 2004. "The choice of exchange rate regimes in developing countries: A mulitnominal panal analysis," ZEI Working Papers B 32-2004, University of Bonn, ZEI - Center for European Integration Studies.
    14. Lars Einar Legernes & Erling Vardal, 2000. "From Fixers to Floaters: An Empirical Analysis of the Decline in Fixed Exchange Rate Regimes 1973-1995," Econometric Society World Congress 2000 Contributed Papers 1754, Econometric Society.
    15. Eichengreen, Barry & Hausmann, Ricardo & Panizza, Ugo, 2003. "Le péché originel : le calvaire, le mystère et le chemin de la rédemption," L'Actualité Economique, Société Canadienne de Science Economique, vol. 79(4), pages 419-455, Décembre.
    16. Pierre-Guillaume Méon & Jean-Marc Rizzo, 2002. "The Viability of Fixed Exchange Rate Commitments: Does Politics Matter? A Theoretical and Empirical Investigation," Open Economies Review, Springer, vol. 13(2), pages 111-132, April.
    17. Paolo Mauro & Grace Juhn, 2002. "Long-Run Determinants of Exchange Rate Regimes; A Simple Sensitivity Analysis," IMF Working Papers 02/104, International Monetary Fund.
    18. 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.
    19. repec:prg:jnlpep:v:2013:y:2013:i:4:id:431:p:391-411 is not listed on IDEAS
    20. Jesse Russell, 2012. "Herding and the shifting determinants of exchange rate regime choice," Applied Economics, Taylor & Francis Journals, vol. 44(32), pages 4187-4197, November.

    More about this item

    Keywords

    Developing Countries; EMS; Exchange Rate Regime; Export Diversification;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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