National Culture and the Choice of Exchange Rate Regime
56 Pages Posted: 17 Dec 2018
Date Written: December 2, 2018
We posit that national culture can affect the choice of exchange rate regime. Using data covering 78 countries over the period 1976–2014 and controlling for common determinants of exchange rate regimes, we find that individualistic countries have a significantly higher probability of implementing a floating regime than a fixed regime. This result is robust to using the instrumental variables approach, alternative estimation technique, alternative regime classification, alternative proxies for culture, subsample analysis, and additional controls. In additional analysis, we investigate the performance of different exchange rate regimes in terms of economic growth and inflation across individualistic versus collectivistic countries. The results suggest that individualistic countries that adopt freely floating and managed floating regimes tend to enjoy faster economic growth than those using a fixed rate regime. Finally, we find that other cultural dimensions (power distance, masculinity, and uncertainty avoidance) also influence the choice of exchange rate regime, but their effect is weaker than that of individualism.
Keywords: national culture; individualism/collectivism; exchange rate regime; economic growth
JEL Classification: F30; F31
Suggested Citation: Suggested Citation