Empirical regime choice models are used to explain how the underlying exchange rate regime is related to the economic, financial and political characteristics of the country in question. In these models, the dependent variable can be either discrete, taking values representing the exchange rate regime (for example, zero for fixed and one for flexible) or it could be continuous, taking the form of a measure of exchange rate flexibility (like what we came across in Chapter 3). These values can be based on de jure or de facto classifications and they can be more disaggregated (for example, fixed, intermediate and floating, or even more classification categories). The explanatory variables, on the other hand, are numerous, but they can be classified under the headings: (i) optimum currency area (OCA) factors, (ii) other economic and monetary factors, (iii) fear of floating factors, and (iv) political economy factors. Some of these variables can be classified under more than one of these headings. Table 8.1, which is by no means exhaustive, lists the potential determinants of exchange rate regime choice (explanatory variables) classified under the four headings.
KeywordsEurope Covariance Income Expense Tate
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