Determinants of the Choice of Exchange Rate Regimes in Six Central American Countries

This paper examines whether decisions about the appropriate exchange rate regime in six Central American countries were based on longer-run economic fundamentals or on the confluence of historical and political circumstances. To uncover any actual relationship both across countries and across time, we estimate several probit and multinomial logit models of exchange rate regime choice with data spanning the period 1974-2001. We find that theoretical long-run determinants, such as trade openness, export share with the major trading partner, economic size, and per capita income, are adequate, but not robust, predictors of exchange rate regime choice. However, we were not able to establish a statistically significant association between the terms of trade fluctuations or capital account openness and a particular regime in any specification using our sample.Exchange rate regimes;exchange rate, exchange rate regime, terms of trade, trade openness, trading partner, exchange rates, output volatility, exchange rate volatility, exchange restrictions, exchange arrangements, output growth, openness to capital flows, foreign exchange, per capita income, fixed exchange rate, official exchange rate, home currency, official exchange rate regime, floating exchange rates, floating exchange rate, real exchange rate, export share, fixed fixed exchange rates, political economy, optimum currency areas, flexible exchange rate, exchange rate regime classification, exchange rate system, exchange rate policies, nominal exchange rate, exchange rate policy, foreign exchange reserves, exchange rate arrangement, currency areas, annual exchange rate, flexible exchange rates, real exchange rate volatility, exchange rate risk, exchange rate flexibility, exchange rate arrangements, short-term debt, exchange rate pegs, world economy, exchange rate peg, fixed exchange rate regime, exchange reserves, exchange rate systems, exchange rate regime classifications, foreign trade, open economy, exchange rate category, exchange rate changes, exchange rate behavior, flexible exchange rate system, currency boards, trade links, exchange rate choice, external shocks, floating exchange rate regime, partner countries, export diversification, low trade, flexible exchange rate regime, exchange rate variability, average exchange rate, political costs, balance of payments, trade integration, floating dollar exchange rate, open economies, currency unions, exchange rate classification, export growth, history of exchange rate, foreign exchange market