Choice of exchange rate regime in transition economies: An empirical analysis

In this paper we identify the main determinants of the exchange rate regimes in transition economies (TEs). We use an ordered logit model for the official (de jure) and the actual (de facto) exchange rate classifications and find that the de facto regimes describe better the exchange rate strategies implemented in TEs. In addition, economic size and geographical concentration of trade are important determinants of exchange rate regimes. Furthermore, consistent with the sustainability hypothesis, countries experiencing increasing inflation and having higher budget deficits favor flexible regimes. Moreover, having a more developed financial sector increases the likelihood of choosing floating exchange rates. Finally, we find that countries with stronger governments and higher political stability favor pegs. Journal of Comparative Economics 34 (3) (2006) 484-498.