The Political Economy of Exchange Rate Regime Determination: Theory and Evidence

Posted: 8 Jan 2009

Date Written: 2008

Abstract

This paper studies exchange rate regime choice from a positive perspective by modeling the interplay of monetary and fiscal policy, credibility and financial market microstructure as factors influencing the decision on de facto regime. The model shows how a small open economy reliant on foreign sources of financing is likely to opt for a stable regime. Furthermore, a stable political environment with a high degree of accountability is conducive to choosing a flexible regime. The findings suggest that flexible rather than fixed exchange rate regimes provide more fiscal discipline.

Keywords: Exchange rate regime choice, Political economy, Financial markets microstructure

JEL Classification: E63, F30, F41, G15

Suggested Citation

Kimakova, Alena, The Political Economy of Exchange Rate Regime Determination: Theory and Evidence (2008). Economic Systems, Vol. 32, No. 4, 2008, Available at SSRN: https://ssrn.com/abstract=1324652

Alena Kimakova (Contact Author)

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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