Working Paper: CEPR ID: DP5530
Authors: Jürgen von Hagen; Jizhong Zhou
Abstract: This paper uses a panel probit model with simultaneous equations to explain the joint determination of de facto and de jure exchange rate regimes in developing countries since 1980. We also derive an ordered-choice panel probit model to explain the causes of discrepancies between the two regime choices. Both models are estimated using simulation-based maximum likelihood methods. The results of the simultaneous equations model suggest that the two regime choices are dependent of each other and exhibit considerable state dependence. The ordered probit model provides evidence that regime discrepancies reflect an error-correction mechanism, and the discrepancies are persistent over time.
Keywords: de facto exchange rate regimes; developing countries; simulated maximum likelihood; simultaneous equations model
JEL Codes: C35; F33; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intention to adopt a flexible de jure regime (E69) | desirability of a flexible de facto regime (F55) |
| low inclination towards a de facto fixed regime (P39) | attractiveness of flexible de jure arrangements (F33) |
| larger economies (P19) | fear of floating (F31) |
| higher inflation rates (E31) | fear of floating (F31) |
| advanced financial systems (G29) | fear of pegging (D50) |
| intensive capital controls (F38) | fear of pegging (D50) |
| fear of floating (F31) | discrepancies in exchange rate regimes (F31) |
| fear of pegging (D50) | discrepancies in exchange rate regimes (F31) |