On the Endogeneity of Exchange Rate Regimes

KSG Working Paper No. RWP06-047

Universidad Torcuato Di Tella, CIF Working Paper No. 11-02

46 Pages Posted: 21 May 2005

See all articles by Eduardo Levy Levy-Yeyati

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Federico Sturzenegger

Universidad Torcuato Di Tella; Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Iliana G. Reggio

Universidad Carlos III de Madrid

Date Written: November 2006

Abstract

The literature has identified three main approaches to account for the way exchange rate regimes are chosen: i) the optimal currency area theory; ii) the financial view, which highlights the consequences of international financial integration; and iii) the political view, which stresses the use of exchange rate anchors as credibility enhancers in politically challenged economies. Using de facto and de jure regime classifications, we test the empirical relevance of these approaches separately and jointly. We find overall empirical support for all of them, although the incidence of financial and political aspects varies substantially between industrial and non-industrial economies. Furthermore, we find that the link between de facto regimes and their underlying fundamentals has been surprisingly stable over the years, suggesting that the global trends often highlighted in the literature can be traced back to the evolution of their natural determinants, and that actual policies have been little influenced by the frequent twist and turns in the exchange rate regime debate.

Keywords: Economics - International Economics, exchange rates, growth, impossible trinity, dollarization, capital flows

JEL Classification: F30, F33

Suggested Citation

Levy-Yeyati, Eduardo Levy and Sturzenegger, Federico and Reggio, Iliana G., On the Endogeneity of Exchange Rate Regimes (November 2006). KSG Working Paper No. RWP06-047, Universidad Torcuato Di Tella, CIF Working Paper No. 11-02, Available at SSRN: https://ssrn.com/abstract=726910 or http://dx.doi.org/10.2139/ssrn.726910

Eduardo Levy Levy-Yeyati (Contact Author)

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Federico Sturzenegger

Universidad Torcuato Di Tella ( email )

Minones 2159
1428 Buenos Aires, 1428
Argentina

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-496-3255 (Phone)
617-496-1722 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Iliana G. Reggio

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain
34916249587 (Phone)

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