The Choice of Exchange Rate Regimes in Developing Countries

Employing a random-effect, panel data, multinomial discrete choices model, the paper analyzes the choice of exchange rate regimes in developing countries since the collapse of the Bretton Woods system. The paper estimates both the static and dynamic versions of the model by using simulated maximum likelihood techniques. Explanatory variables include the Optimum Currency Area (OCA) criteria, optimal stabilization considerations, and factors related to the risk of currency crises. The paper finds that the OCA criteria provide some guidelines for the choice of exchange rate regimes, and that many variables influence the choice of intermediate exchange rate regimes differently from their influence on that of flexible or fixed regimes. The paper also finds that the higher serial correlation of the regime choices is mainly due to the presence of strong state dependence in exchange rate regime choices.