Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice

Abstract

Conditional on choosing a pegged exchange rate regime, what determines the currency to which countries peg or anchor their exchange rate? This paper aims to answer this question using a panel multinomial logit framework, covering more than 100 countries for the period 1980-1998. We find that trade network externalities are a key determinant of anchor currencies in the international monetary system. Other factors found to be related to anchor currency choice include the symmetry of output co-movement, the currency denomination of debt, and legal or colonial origins.

Keywords: exchange rate regime, anchor, network externalities, optimal currency area, international currency, de facto

JEL Classification: E42, F02, F33