The Effect of Government Ideology on an Exchange Rate Regime: Some International Evidence

Authors


  • We would like to thank the Editor, Professor Zhihong Yu and the three anonymous referees for their valuable comments, which have led to a substantial improvement in the original paper. Chun-Ping Chang is grateful to the National Science Council of Taiwan for financial support through grant NSC 100-2410-H-158-003.

Abstract

This paper comprehensively investigates the effect of government ideology on the type of exchange rate regime that a country implements via multinomial logit and multinomial probit models for 147 countries in the period 1974–2009. Our results clearly indicate that a left-wing government increases the likelihood that a country implements a flexible regime in the classifications of exchange rate regimes. Nevertheless, evidence is weaker when using the de jure IMF course classification, which is set up by Ilzetzki et al. (2008). In a deeper investigation, we find that left-wing governments are more likely to choose a flexible regime relative to a fixed one in our sample of OECD, non-OECD and non-Eurozone countries, as the impacts from government ideology on the determinant of the choice of exchange rate regime in Eurozone countries disappear. More importantly, we present many explanations for exchange rate regime choices when macroeconomic conditions, political constraints and institutions impact the choice of exchange rate regime.

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