Abstract:

After more than 40 years of the current monetary system, the issue of the optimal choice of the exchange rate regime remains unresolved. Indeed, we experienced a diversity of regimes and an instability of the choices made with many countries switching from one regime to another. The paper investigates empirically the possible link between financial development and the choice of optimal exchange rate regime. To measure financial development, we introduce a composite index via the aggregation of five indices representing the key characteristics of the financial system in 51 developing countries over the period 1996-2007. The aim is to better consider the multidimensional dynamics of financial sector development. We use a multinomial logit model with panel data of the same countries and period. We consider two classifications of exchange rate regimes: “de jure” and “de facto”. The results suggest that financially developed countries are more likely to adopt the floating regime. It appears also that the choice of a floating regime is, notably, enhanced by financial openness and financial markets development. Key Words: Exchange Rate Regimes, Developing/Emerging Countries, Financial Development Index Construction, Multinomial Panel Logit Model.

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