The empirical relationship between financial development and foreign exchange regimes: Did global financial crisis of 2007-2009 change regime preferences?

Abstract

This paper studies the empirical nexus between financial development and foreign exchange regime choices of two sets of countries as developed and developing economies. Data covers for the period of 2000-2016 and we employed ordered logistic regression models and found out that more developed financial systems contributes to greater flexibility in exchange rate regimes. We also found that domestic macroeconomic environment and the level of global economic integration play a role in the choice of exchange rate regime. Furthermore, developing countries favour more restrictive regimes while developed countries favour more flexible regimes. Global financial crisis of 2007-2009 has altered the level of influence exerted on the choice of regimes by the so called determinants of regime choice. We specifically discovered that the explanatory powers of the domestic and international macroeconomic environments on regime choice have waned post crises, suggesting that countries have chosen keep tighter control on exchange rates.