National Culture and the Choice of Exchange Rate Regime

59 Pages Posted: 17 Dec 2018 Last revised: 3 Oct 2019

See all articles by Zhongyu (Edward) Cao

Zhongyu (Edward) Cao

Department of Economics, University of South Carolina

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Chuck C.Y. Kwok

University of South Carolina - Darla Moore School of Business

Date Written: December 2, 2018

Abstract

Based on the social analysis framework of Williamson, we argue that national culture – especially the individualism/collectivism dimension – located in the social embeddedness level can guide behaviors and decisions in a country, including the choice of exchange rate regime. We argue that individualistic societies are more likely to choose floating regimes because their economic agents are independent, overconfident, and have higher levels of risk tolerance. Individualistic societies are also associated with better financial development, fewer capital controls, and more democratic institutions, which are all tied to a higher probability of choosing a floating exchange rate regime. We use data on 78 countries over the 1976-2014 period, and we control 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. Our evidence is robust to using an instrumental variables approach, an alternative estimation technique, an alternative regime classification, alternative proxies for culture, a subsample analysis, and additional controls. We also find that other cultural dimensions (uncertainty avoidance, power distance, and masculinity) can 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

Cao, Zhongyu and El Ghoul, Sadok and Guedhami, Omrane and Kwok, Chuck C.Y., National Culture and the Choice of Exchange Rate Regime (December 2, 2018). Available at SSRN: https://ssrn.com/abstract=3294395 or http://dx.doi.org/10.2139/ssrn.3294395

Zhongyu Cao

Department of Economics, University of South Carolina ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States
301-844-8522 (Phone)

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Chuck C.Y. Kwok

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-777-3606 (Phone)
803-777-3609 (Fax)

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