توسعه نهادی و انتخاب نظام نرخ ارز: تجزیه و تحلیل متقابل کشور

This paper investigates the choice of exchange rate regime by analyzing both de jure and de facto regime choices for the period 1973–1996. It finds that economic fundamentals, financial and political institutional variables provide relevant guidance for de jure regime choices. However, shocks are found to be the determinants of a de facto regime choice. The analysis shows that only a highly financially liberalized economy can sustain a corner regime. A partial financial liberalization increases the probability of divergence from the de jure regime in the face of various shocks, but an increase in the level of financial reforms decreases the probability of divergence. Moreover, regime choices are influenced by the IMF and regional financial architecture. The political institutions play an important role in the choice of a regime; however, their role varies with the level of financial development. J. Japanese Int. Economies23 (1) (2009) 56–70.

The relationship between financial structure and the choice of a currency regime has long been studied. A country with an underdeveloped financial system often faces higher inflation, lack of debt sustainability, a fragile banking system, and macroeconomic and exchange rate volatility. These structural features make it difficult for the country to adopt a floating exchange rate regime as a solution of the classical “trilemma”,1 but also make fixed exchange rate regimes prone to crises when capital is internationally mobile. In such countries, sharp currency depreciation alters the domestic currency value of their external debt, which increases “liability dollarization” and leads to “balance sheet” effect (Eichengreen and Hausman, 1999). If liability dollarization causes problems under a floating regime, it simultaneously makes fixed exchange rate regimes harder to maintain. The financial fragility arising from unhedged foreign debts exposes fixed exchange rate regimes to speculative attack through a number of channels—one of which is the resulting vulnerability of the banking system to depositor panic. Therefore, countries with weak financial institutions often face difficulties in choosing and sustaining either a fixed or a floating regime, and therefore diverge from their de jure regime. Empirically, one should observe that countries that peg are those that are in need of an anchor and do not have the necessary institutions needed to maintain macroeconomic stability. On the other hand, if countries are more prone to real volatility, they are likely to adopt floating regime. These countries deviate from their announcements not only because they cannot maintain conditions compatible with pegs or floats, but they do not have the necessary financial and political institutions as well. Hence, development of institutions, both financial and political, remains a key policy option for sustaining a currency regime. Although economists provide various answers to the choice of a currency regime based on economic fundamentals, shocks, financial structure and political institutions, most of the existing studies analyze the choice of exchange rate regime by using de jure regime data without proper considerations given to the de facto regime choice (or the divergence from the de jure regime). For this reason, some authors cast doubt on the validity of earlier results on the choice of a regime (Rogoff et al., 2003). The objective of this study is to explain the dynamics of divergence, and within that context, to identify the factors that lead to the divergence in particular, and the choice of a regime in general. A few studies have attempted to explain the divergence. Calvo and Reinhart (2002) argue that countries with high unhedged foreign currency denominated debt or high exchange rate risk exposure have an incentive to peg even if they are officially floating, terming this as “fear of floating”. On the other hand, some countries are experiencing fear of pegging—a fear that pegging would invite speculative attacks as a result of destabilizing misalignment ( Levy-Yeyati and Sturzenegar, 2002 and Genberg and Swoboda, 2005). In a political economy study, Alesina and Wagner (2006) show that the lack of quality of a country's legal and political institutions lead countries to diverge from their de jure regime. Even though these studies provide some explanations to the divergence, they have not studied the choice of a de facto regime (or reasons of divergence) directly. Another potential problem with existing studies is that they appear to suffer from omitted variable bias as they do not consider all four kinds of relevant variables, such as shocks, economic structure, financial and political institutions together either in the analysis of divergence or in the choice of a de jure regime. Therefore, it is not clear from these studies whether institutional aspect (either financial or political or both) is crucial for the choice of a regime. The empirical analysis of this study addresses these issues in explaining the choice of a regime. The analysis is approached from two different angles. First, the determinants of a de jure regime choice are investigated, and second, the reasons of divergence from the de jure intermediate and floating regimes are analyzed by considering four categories of relevant explanatory variables: shocks, structure, financial and political institutions.2 This empirical approach allows for obtaining consistent estimates of parameters in explaining the choice of a regime. For empirical analysis, the ordered logit model is applied. This study also investigates the role of the IMF and regional influence on the choice of an exchange rate regime. In addition, this study endeavors to explain the possibility of learning during the period of divergence empirically.3 If divergence happens due to institutional weaknesses, it suggests that these countries may improve the quality of institutions during the period of divergence in order to converge to the de jure regime. According to this interpretation, the period of divergence can be viewed as the period of “learning”.4 Learning may foster financial reforms through reassessment of the costs and benefits of the de jure regime. In this way learning can help reduce the uncertainty in exchange rates under the de jure regime being chosen. Thus the possibility of learning implies a dynamic relationship between divergence and subsequent financial policy reforms undertaken in order to return to the de jure regime. This study therefore specifies this relationship and it assesses the impact of financial liberalization on the choice of an exchange rate regime. To summarize the main results, using a sample of 34 countries from the OECD, East Asia, South Asia, Latin America, Africa and Middle East for the period 1973–1996 (see Appendix A for the list of countries), this study finds that economic fundamentals, shocks, financial and political institutional variables provide relevant guidance for de jure regime choices. However, various shocks lead financially underdeveloped countries to diverge from the de jure intermediate (fixed) or floating regime. It is found that during the period of divergence, countries undertake necessary financial reforms as a process of learning to de jure regime. This finding indicates that financial reforms can shield economies from the shocks arising from a particular currency regime. The political institutions play an important role in the choice of a regime, but it varies with the level of financial development. These findings establish the fact that the development of financial system is crucial for the sustainable choice of a fixed or a floating exchange rate regime. The remainder of the article is divided into four sections. Section 2 reviews the related literature on the choice of a regime. Section 3 discusses the data used. Section 4 discusses the empirical results and Section 5 concludes the paper.

This study provides a comprehensive analysis on the choice of an exchange rate regime. The empirical results indicate that economic fundamentals, political and financial institutional variables provide relevant guidance to the de jure regime choice. Although the literature of the 1980s identified an important role of shocks on the choice of a (de jure) currency regime, this study specifies that shocks are the determinant of a de facto regime choice. The analysis finds that countries with weak financial institutions often diverge from the de jure fixed (intermediate) or floating regime in the face of various shocks. But countries work toward increasing the level of financial development (liberalization) during the period of divergence as it is found that an increase in the level of financial liberalization decreases the probability of divergence. And in this way countries taper off the risks of the initially chosen de jure regime. Hence, the period of divergence can be viewed as the “period of learning” as to how to increase the sustainability of the de jure regime, in other words, how to reduce the risks associated with the de jure fixed or floating regime. It is found that financial liberalization increases the probability of banking crisis in intermediate regimes but decreases the probability of banking crisis in floating regime. From the analysis, financial liberalization seems crucial for the choice of a floating regime. Moreover, it is seen that political institutional variables behave differently at different financial environments, indicating that the role of the financial institutions is important for the choice of an exchange rate regime. This study identifies a significant role of the IMF programs on the choice of a floating regime. However, IMF programs are also found significant to the divergence from both intermediate and floating regime, indicating a failure of IMF's stabilization programs in these two regimes. Such a failure lead countries diverge from their official regime and they do not declare the divergence officially perhaps from the “fear of the IMF”, that is, the fear that they will loose financial assistance from the IMF. These findings call for a careful reappraisal of the exchange-rate based stabilization programs from the part of the IMF. Moreover, it is evident from the analysis that regime choices are also influenced by the regional financial architecture. This study considers financial liberalization as a proxy for financial development. Although financial liberalization ensures more efficient allocation of capital and higher levels of savings and investment, the relationship between financial liberalization and financial development still remains ambiguous. For example, financial liberalization is not always ensuring equity market development unless a certain level of legal attainment achieved. On the other hand, an increased banking sector competition, following financial liberalization, will not necessarily induce efficient financial intermediation. Increased competition is likely to erode franchise values, which may, in turn, generate a fragile banking system where speculative behavior on the part of the banks is more likely. Increased competition can also discourage relationship-banking, which is sometimes deemed as efficient mode of contracting in a dynamic setting characterized by asymmetric information. We have ignored such feedback channels in our model. It would be useful to distinguish between various types of liberalization and reform in line with the existence of an appropriate institutional and regulatory framework designed to effectively curb imprudent bank behavior. Combining some of the above elements with our analysis may help elucidate the impact of financial development on the choice of a currency regime more appropriately. However, our understanding on financial development is still limited and much further work should be done.