Persistence, Capital Account Openness, and Financial Sector Health in Exchange Rate Regime Choice

Abstract

This paper investigates empirically the persistence in exchange rate regimes as well as the role of capital account openness and financial sector health (measured by financial development and financial sector fragility) in exchange rate regime determination for a panel of 143 countries covering the post‐Bretton Woods period. The results demonstrate that while low‐ and high‐income countries exhibit highly persistent exchange rate regimes, middle‐income countries display relatively lower persistence. For middle‐income countries, capital account openness and the level of financial development play important roles in exchange rate regime choice. The fragility of the financial sector does not affect the exchange rate regime determination.