The political economy of exchange rate regimes in developed and developing countries

This paper examines the influence of government ideology, political institutions and globalization on the choice of exchange rate regime via panel multinomial logit approach using annual data over the period of 1974-2004 in a panel of 180 countries: 26 developed and 154 developing.We provide evidence that government ideology, political institutions and globalization are important determinants of the choice of exchange rate regime. In particular, we find that left-wing governments, democratic institutions, central bank independence and financial development increase the likelihood of choosing a flexible regime, whereas more globalized countries have a higher probability of implementing a fixed regime. More importantly, we find that political economy factors have different effects on the choice of exchange rate regime in developed and developing countries. All our results are robust to panel ordered probit model.

► We examine the influence of political ideology on choice of exchange rate regime. ► Using panel multinomial logit model, annual data over the period of 1974-2004. ► Samples in a panel of 180 countries: 26 developed and 154 developing. ► We find that left-wing government increase the choosing a flexible regime. ► All our results are robust to panel ordered probit model.