National Culture and the Choice of Exchange Rate Regime

56 Pages Posted: 17 Dec 2018

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

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

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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