IDEAS home Printed from https://ideas.repec.org/p/wef/wpaper/0009.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Christopher Meissner & Nienke Oomes, 2006. "Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice," WEF Working Papers 0009, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  • Handle: RePEc:wef:wpaper:0009
    as

    Download full text from publisher

    File URL: http://www.worldeconomyandfinance.org/working_papers_publications/working_paper_PDFs/WEF0009.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376 National Bureau of Economic Research, Inc.
    2. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
    3. Oomes, Nienke, 2003. "Local trade networks and spatially persistent unemployment," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2115-2149, September.
    4. Jeffrey A. Frankel, 2003. "Experience of and Lessons from Exchange Rate Regime in Emerging Economies," NBER Working Papers 10032, National Bureau of Economic Research, Inc.
    5. Nienke Oomes, 2003. "Network Externalities and Dollarization Hysteresis; The Case of Russia," IMF Working Papers 03/96, International Monetary Fund.
    6. Sebastian Edwards, 1996. "The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes," NBER Working Papers 5756, National Bureau of Economic Research, Inc.
    7. 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.
    8. Masson, Paul R., 2001. "Exchange rate regime transitions," Journal of Development Economics, Elsevier, vol. 64(2), pages 571-586, April.
    9. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-131, March.
    10. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    11. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    12. 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.
    13. 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.
    14. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    15. Maurice Obstfeld & Alan M. Taylor, 1998. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Chapters,in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 353-402 National Bureau of Economic Research, Inc.
    16. Ernesto H. Stein & Jeffry Frieden & Piero Ghezzi, 2000. "Politics and Exchange Rates: A Cross-Country Approach to Latin America," Research Department Publications 3119, Inter-American Development Bank, Research Department.
    17. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September.
    18. Glick, Reuven & Rose, Andrew K., 2002. "Does a currency union affect trade? The time-series evidence," European Economic Review, Elsevier, vol. 46(6), pages 1125-1151, June.
    19. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank.
    20. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    21. Rizzo, Jean-Marc, 1998. "The economic determinants of the choice of an exchange rate regime: a probit analysis," Economics Letters, Elsevier, vol. 59(3), pages 283-287, June.
    22. Dowd, Kevin & Greenaway, David, 1993. "Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimum Currency Areas," Economic Journal, Royal Economic Society, vol. 103(420), pages 1180-1189, September.
    23. Dreyer, Jacob S., 1978. "Determinants of exchange-rate regimes for currencies of developing countries: Some preliminary results," World Development, Elsevier, vol. 6(4), pages 437-445, April.
    24. Catherine A Pattillo & Paul R Masson, 2001. "Monetary Union in West Africa (ECOWAS)," IMF Occasional Papers 204, International Monetary Fund.
    25. John F. O. Bilson & Richard C. Marston, 1984. "Exchange Rate Theory and Practice," NBER Books, National Bureau of Economic Research, Inc, number bils84-1.
    26. Etienne B Yehoue, 2005. "On the Pattern of Currency Blocs in Africa," IMF Working Papers 05/45, International Monetary Fund.
    27. Tamim Bayoumi and Barry Eichengreen., 1996. "Ever Closer to Heaven? An Optimum-Currency-Area Index for European Countries," Center for International and Development Economics Research (CIDER) Working Papers C96-078, University of California at Berkeley.
    28. Andrea Bubula & Inci Ötker, 2002. "The Evolution of Exchange Rate Regimes Since 1990; Evidence From De Facto Policies," IMF Working Papers 02/155, International Monetary Fund.
    29. Flandreau, Marc, 1995. "An Essay on the Emergence of the International Gold Standard, 1870-80," CEPR Discussion Papers 1210, C.E.P.R. Discussion Papers.
    30. Alberto Alesina & Alexander F. Wagner, 2006. "Choosing (and Reneging on) Exchange Rate Regimes," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 770-799, June.
    31. Ugo Fasano-Filho & Andrea Schaechter, 2003. "Monetary Union Among Member Countries of the Gulf Cooperation Council," IMF Occasional Papers 223, International Monetary Fund.
    32. Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.
    33. Barry Eichengreen and Marc Flandreau., 1994. "The Geography of the Gold Standard," Center for International and Development Economics Research (CIDER) Working Papers C94-042, University of California at Berkeley.
    34. Meissner, Christopher M., 2005. "A new world order: explaining the international diffusion of the gold standard, 1870-1913," Journal of International Economics, Elsevier, vol. 66(2), pages 385-406, July.
    35. Barry Eichengreen, 2010. "Global Imbalances and the Lessons of Bretton Woods," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262514141, January.
    36. Flandreau, Marc, 1996. "The French Crime of 1873: An Essay on the Emergence of the International Gold Standard, 1870–1880," The Journal of Economic History, Cambridge University Press, vol. 56(04), pages 862-897, December.
    37. Levy Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2010. "On the endogeneity of exchange rate regimes," European Economic Review, Elsevier, vol. 54(5), pages 659-677, July.
    38. Pentti J. K. Kouri & Jorge Braga De Macedo, 1978. "Exchange Rates and the International Adjustments Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 111-158.
    39. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    40. Heller, H Robert, 1978. "Determinants of Exchange Rate Practices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(3), pages 308-321, August.
    41. 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.
    42. Savvides, Andreas, 1990. "Real exchange rate variability and the choice of exchange rate regime by developing countries," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 440-454, December.
    43. Eichengreen, Barry & Bayoumi, Tamim, 1996. "Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations," Center for International and Development Economics Research, Working Paper Series qt1td5x343, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    44. Helene Poirson Ward, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
    45. 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.
    46. Paolo Mauro & Grace Juhn, 2002. "Long-Run Determinants of Exchange Rate Regimes; A Simple Sensitivity Analysis," IMF Working Papers 02/104, International Monetary Fund.
    47. G. S. Maddala, 1987. "Limited Dependent Variable Models Using Panel Data," Journal of Human Resources, University of Wisconsin Press, vol. 22(3), pages 307-338.
    48. Paul R. Krugman, 1984. "The International Role of the Dollar: Theory and Prospect," NBER Chapters,in: Exchange Rate Theory and Practice, pages 261-278 National Bureau of Economic Research, Inc.
    49. Yusuru Ozeki & George S Tavlas, 1992. "The Internationalization of Currencies; An Appraisal of the Japanese Yen," IMF Occasional Papers 90, International Monetary Fund.
    50. Toru Iwami, 1994. "The Internationalization of Yen and Key Currency Questions," IMF Working Papers 94/41, International Monetary Fund.
    51. Bernhard, William & Leblang, David, 1999. "Democratic Institutions and Exchange-rate Commitments," International Organization, Cambridge University Press, vol. 53(01), pages 71-97, December.
    52. Etienne B Yehoue, 2004. "Currency Bloc Formation as a Dynamic Process Based on Trade Network Externalities," IMF Working Papers 04/222, International Monetary Fund.
    53. Pentti J.K. Kouri & Jorge B. de Macedo, 1978. "Exchange Rates and the International Adjustment Process," Cowles Foundation Discussion Papers 488, Cowles Foundation for Research in Economics, Yale University.
    54. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    55. Romain M Veyrune, 2007. "Fixed Exchange Rates and the Autonomy of Monetary Policy; The Franc Zone Case," IMF Working Papers 07/34, International Monetary Fund.
    56. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 301-352.
    57. Peter B. Kenen & Ellen E. Meade, 2006. "Monetary integration in East Asia," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    58. repec:hrv:faseco:34721963 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michael Bleaney & Mo Tian, 2012. "Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar," Open Economies Review, Springer, vol. 23(5), pages 785-803, November.
    2. Liu, Tao & Wang, Xiaosong, 2016. "The Road to International Currency: Global Perspective and Chinese Experience," MPRA Paper 72877, University Library of Munich, Germany.
    3. Roland Beck & Sebastian Weber, 2011. "Should Larger Reserve Holdings Be More Diversified?," International Finance, Wiley Blackwell, vol. 14(3), pages 415-444, December.
    4. Christoph Fisher, 2011. "Currency blocs in the 21st century," Globalization and Monetary Policy Institute Working Paper 87, Federal Reserve Bank of Dallas.
    5. Carsten Hefeker, 2010. "Taxation, corruption and the exchange rate regime," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 338-346, March.
    6. Levy Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2010. "On the endogeneity of exchange rate regimes," European Economic Review, Elsevier, vol. 54(5), pages 659-677, July.
    7. Hyoung-kyu Chey, 2013. "The Concepts, Consequences, and Determinants of Currency Internationalization," GRIPS Discussion Papers 13-03, National Graduate Institute for Policy Studies.
    8. Jacks, David S. & Meissner, Christopher M. & Novy, Dennis, 2011. "Trade booms, trade busts, and trade costs," Journal of International Economics, Elsevier, vol. 83(2), pages 185-201, March.
    9. Thomas Plümper and Eric Neumayer, 2008. "Exchange Rate Regime Choice with Multiple Key Currencies," The Institute for International Integration Studies Discussion Paper Series iiisdp264, IIIS.
    10. Fischer, Christoph, 2016. "Determining global currency bloc equilibria: An empirical strategy based on estimates of anchor currency choice," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 214-238.
    11. Carlos Vieira & Isabel Vieira, 2013. "Monetary Integration In Eastern And Southern Africa: Choosing A Currency Peg For Comesa," South African Journal of Economics, Economic Society of South Africa, vol. 81(3), pages 356-372, September.
    12. Lin, Yo-Long, 2017. "Is the price path learnable under a fixed exchange rate regime?," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 355-366.
    13. Fischer, Christoph, 2015. "Determining global currency bloc equilibria," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113197, Verein für Socialpolitik / German Economic Association.
    14. Antonia López-Villavicencio & Marc Pourroy, 2017. "IT Countries: A Breed Apart? the case of Exchange Rate Pass-Through," Working Papers 1728, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    15. Bracke, Thierry & Bunda, Irina, 2011. "Exchange rate anchoring - Is there still a de facto US dollar standard?," Working Paper Series 1353, European Central Bank.
    16. Bohn Frank, 2013. "The Politics of Surprise Devaluations: Modelling Motives for Giving Up a Peg," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(5-6), pages 562-574, October.
    17. Graham Bird & Alex Mandilaras & Helen Popper, 2012. "Explaining Shifts in Exchange Rate Regimes," School of Economics Discussion Papers 1312, School of Economics, University of Surrey.
    18. ORĂȘTEAN Ramona, 2015. "The Official Use Of International Currencies – Assessments And Implications," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 10(3), pages 71-80, December.
    19. Willie Lahari, 2011. "Exchange Rate Volatility and Choice of Anchor Currency - Prospects for a Melanesian Currency Union," Working Papers 1111, University of Otago, Department of Economics, revised Oct 2011.
    20. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.
    21. Bednarik, Radek, 2009. "Bretton-Woodský měnový systém: Systém fixních nebo de-facto plovoucích kurzů?
      [Bretton-Woods Monetary System: Was It Fixed or De-facto Floating?]
      ," MPRA Paper 15297, University Library of Munich, Germany.
    22. Ghosh, Amit, 2014. "A comparison of exchange rate regime choice in emerging markets with advanced and low income nations for 1999–2011," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 358-370.
    23. Menzie Chinn, 2015. "Emerging Market Economies and the Next Reserve Currencies," Open Economies Review, Springer, vol. 26(1), pages 155-174, February.

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wef:wpaper:0009. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tim Byne). General contact details of provider: http://edirc.repec.org/data/debbkuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.