State dependence and exchange rate regime choice: a new empirical explanation to the polarization phenomenon

Abstract

This paper, using the dynamic multinomial choice random effect panel Logit model, and focusing on the intermediate exchange rate regimes, tries to provide new empirical explanations to the special polarization phenomenon. The main findings are as follows: Firstly, the state dependence can influence the choice of exchange rate regimes greatly, and the state dependence can explain the phenomenon of the special polarization. Secondly, the non-state dependence factors influence exchange rate regimes choice of different development stage economies in different manner. The non-state dependence factors can also explain the special polarization. Thirdly, the policy makers will choose the less-flexible exchange rate regimes with the increasing of capital account openness. The intermediate exchange rate regimes can survive and stabilize the economy under certain conditions. Lastly, this paper draws a series of important conclusions and policy implications.