Journal of Economic Literature 2011, 493, 652–672httpwww.a.docx

Journal of Economic Literature 2011, 49:3, 652–672
http:www.aeaweb.org/articles.php?doi=10.1257/jel.49.3.652
652
1. What’s International about
International Finance?
The exchange rate is an important asset price, perhaps the most
important asset
price. It is also a distinctive asset price. The
price of Exxon stock or the ten-year Treasury
bond rate fluctuates over time in a reason-
ably consistent manner. By way of contrast,
the exchange rate has distinct, well-defined
regimes that are chosen by the government
and maintained by the central bank. No
entity essentially ever attempts to peg the
price of a stock or bond around a central par-
ity with narrow fluctuation bands.1 However,
some economies do fix their exchange rates
(for example, Denmark or Hong Kong),
while others do not (Canada, New Zealand).
A number of countries have changed their
minds on the topic and switched regimes
(Thailand in July 1997, Argentina in January
2002). Official authorities—at least some of
them—clearly reveal through their policies
1 I use “peg” and “fix” interchangeably.

Exchange Rate Regimes in the Modern
Era: Fixed, Floating, and Flaky
Andrew K. Rose*
This paper provides a selective survey of the incidence, causes,
and consequences of a
country’s choice of its exchange rate regime. I begin with a
critical review of Michael
Klein and Jay C. Shambaugh’s (2010) book Exchange Rate
Regimes in the Modern Era,
and then proceed to provide an alternative overview of what the
economics profession
knows and needs to know about exchange rate regimes. While a
fixed exchange rate
with capital mobility is a well-defined monetary regime,
floating is not; thus, it is
unclear whether it is theoretically sensible to compare countries
across exchange rate
regimes. This comparison is quite difficult to make empirically.
It is often hard to figure
out what the exchange rate regime of a country is in practice,
since there are multiple
conflicting regime classifications. More importantly, similar
countries choose radically
different exchange rate regimes without substantive
consequences for macroeconomic
outcomes like output growth and inflation. That is, the
profession knows surprisingly
little about either the causes or consequences of national
choices of exchange rate
regimes. But since the consequences of these choices are small,
understanding their
causes is of only academic interest. (JEL E52, F33)
* University of California, Berkeley, NBER, and CEPR.

I thank the Bank of England and INSEAD for hospitality;
Michael Klein, Jay Shambaugh, Alan Taylor, and the edi-
tor, Roger Gordon, for comments; and Jonathan Ostry for
sharing his work and data. The data set and key output are
freely available at http://faculty.haas.berkeley.edu/arose.
653Rose: Exchange Rate Regimes in the Modern Era
that they care about the exchange rate. One
would then like to understand both the
motivation and the consequences of these
decisions.
The fact that exchange rate policies vary
across countries and time suggests that the
causes and effects of exchange rate regimes
can be understood both empirically and the-
oretically. Such is the compelling motivation
for Exchange Rate Regimes in the Modern
Era (MIT Press 2010), a recent book by
Michael Klein and Jay C. Shambaugh that
summarizes work in the field. The focus is on
the “modern era” since the Bretton Woods
system (of widespread pegged exchange
rates) finally collapsed in 1973. The authors
provide a simple theoretical framework for
their analysis by way of an informal intro-
duction to two of Mundell’s greatest hits—
his trilemma (which states that open capital
markets, fixed exchange rates, and monetary
sovereignty are mutually incompatible), and
his theory of optimum currency areas (which
provides the theoretical basis for a national
money). But they really seek to summarize

and extend the empirical work in the area
of exchange rate regimes, much of which is
their own.
The book is limited, but the book is
good. It is pitched at a moderate technical
level, easily accessible to masters’ students,
advanced undergraduates, and policymak-
ers. The prose is clear and accessible. Most
of the chapters are self-contained pieces
focusing on a well-defined topic, each with
elementary theory, a literature review, and
new empirics. The coverage is both compre-
hensive and balanced. All this is very much
to the good. This slim volume is a valuable
contribution to the literature.
The book is good, but the book is lim-
ited. It does not present a new theory, data
set, or methodology. Much of it is based on
Mundell’s celebrated 1968 textbook, and
uses conventional reduced-form regres-
sions on easily accessible data sets. This is by
design and enhances the accessibility of the
book, while also limiting its research poten-
tial upside.
2. Who’s What?
Klein and Shambaugh begin their study
by reviewing the classifications of exchange
rate regimes. One might think that splitting
the world into countries that have fixed as
opposed to floating exchange rate regimes
is a trivial task, but far from it. In the bad

old days, the International Monetary Fund
(IMF) provided exchange rate regime clas-
sifications based upon official statements of
de jure policy intent by the national authori-
ties; these were used widely through the late
twentieth century. If Nicaragua said that it
maintained a fixed exchange rate in 1990 at
the height of a hyperinflation (as it did), then
it was fixed according to the Fund. This was
clearly an unsatisfactory state of affairs.
During the last decade, a number of
exchange rate regime classifications have
been developed, each of which relies on
actual de facto behavior. The three best-
known alternatives to de jure classifications
are those developed by Eduardo Levy-Yeyati
and Federico Sturzenegger (2003), Carmen
M. Reinhart and Kenneth S. Rogoff (2004),
and Shambaugh (2004). Each is based on
a different technique. Levy-Yeyati and
Sturzenegger combine data on exchange
rates and international reserves using clus-
ter analysis; that way they can account for
exchange market intervention as well as
exchange rate movements. Reinhart and
Rogoff rely on the movements of market-
determined exchange rates; these often
diverge from official ones when there are
parallel or dual markets because of capital
controls. Shambaugh classifies a country as
pegged if its official exchange rate remains
within a small band for a sufficiently long
period of time. All the methods classify nom-
inal exchange rate regimes.

Journal of Economic Literature, Vol. XLIX (September
2011)654
The three systems based on de facto
behavior have one striking common char-
acteristic: all reveal that the de jure classi-
fication is untrustworthy much of the time.
Many countries that state they float actually
intervene to smooth the exchange rate a lot
(a phenomenon known as “fear of floating”).
Conversely, many countries that state they
peg have a lot of inflation and capital controls
so that their currencies actually trade at deep
discounts on black markets. Accordingly, the
profession has concluded that de facto clas-
sifications make a lot more sense than de
jure ones. Indeed, the IMF has classified
exchange rate regimes using a system based
on actual behavior since the late 1990s (nota-
bly leading academic research by years).
When it comes to exchange rate regimes,
as with so many other things, the words of
countries often do not correspond to their
deeds.
But the differences between the three
de facto systems are more apparent than
their commonality. They are available for
different spans of data across both coun-
tries and time (there are also gaps within
Levy-Yeyati and Sturzenegger; the United
Kingdom is not classified until 1987). Most
are annual, but Reinhart and Rogoff is
monthly. Some have a large number of clas-

sifications—Reinhart and Rogoff include
fifteen—but some are simple; Shambaugh’s
only includes two (peg and nonpeg). The
systems have different levels of volatility. A
country changes its exchange rate regime on
average every five years according to Levy-
Yeyati and Sturzenegger, while others show
more stability; Reinhart and Rogoff typically
changes less than once every twenty years.
And the schemes clash. While the official
IMF exchange rate regime for Canada shows
that it has floated since 1970, Reinhart and
Rogoff never classify Canada as floating.
Levy-Yeyati and Sturzenegger show no less
than nine regime switches between 1974
and 2004. In 1990, when the Bank of Canada
stated officially that it was floating, the clas-
sifications ranged from floating (Levy-Yeyati
and Sturzenegger) through a narrow crawl
(Reinhart and Rogoff) to peg (Shambaugh).
The disagreements between the four sys-
tems are common, as shown in table 1 below
(reproduced from chapter 3 of the book).
So there are now four classifications
of exchange rate regimes: official IMF,
Levy-Yeyati and Sturzenegger, Reinhart
and Rogoff, and Shambaugh. Klein and
Shambaugh explore the reasons that these
classifications do not overlap well. As is
common in economics, they conclude that
the different systems are simply measuring
different things, and are thus useful in dif-
ferent contexts. This seems to me like slip-
ping into a warm bath when a cold shower is

more appropriate; to an outsider, it is scary
that one can no longer say with confidence
that currency x at time y was fixed, floating
or whatever.
3. Scoring a Fix
Klein and Shambaugh show that all four
of the exchange rate regime classifications
work tolerably in a precise but limited sense;
countries with fixed exchange rates have
lower exchange rate volatility than countries
that float. One might think that this result is
reassuring, perhaps to the point of banality.
On the contrary; this result actually turns out
to be frightening, simply because it repre-
sents one of the few features of the exchange
rate regime that is observable, sensible, and
robust. Floating exchange rates are more
volatile than fixed ones.2
However, when you move much beyond
the simple linkage between the exchange
2 This is not news. Michael Mussa (1986) wrote
“Under a floating exchange rate regime, real exchange
rates typically show much greater short term variability
than under a fixed exchange rate regime. The increased
variability . . . is largely accounted for by the increased
variability of nominal exchange rates” (p. 117).
rate regime and exchange rate volatility,

you enter unknown (often enemy) territory.
Perhaps the greatest disappointment is in the
empirical modeling of the causes of exchange
rate regimes. Klein and Shambaugh show
convincingly that theories of exchange rate
regime determination simply work terribly in
practice. Former colonies tend to stay fixed
to their colonizers and . . . it’s impossible to
say much more with confidence. One would
think that countries choose their regimes
fundamentally on the basis of national char-
acteristics that move only slowly over time
(such as geographic, political, demographic,
or institutional features), and indeed Klein
and Shambaugh find implicit evidence for
this since country fixed effects are statistically
important. But they, like others, are unable
to link their fixed effect estimates to observ-
ables. Of course if you want to look in just
the right way with just the right measures,
sample, and technique, you can find some-
thing. But positive results on regime deter-
mination have to be handled with care, since
they invariably seem to die when exposed to
light.
The absence of positive results is also true
of the time-series dimension. While countries
have historically switched their exchange
rate regimes frequently, our profession
has made little progress in understanding
why Thailand floated the baht in July 1997
instead of January 1997 or July 1995. Klein
and Shambaugh find some positive duration
dependence in exchange rate pegs; those

regimes that have survived a few years are
likely to continue on. But a strong linkage
between the collapse of fixes and interesting
economic fundamentals—if it exists—has
eluded the profession over the last twenty
years despite our best efforts. This state of
affairs is not the fault of the authors, but it is
still depressing.
One comes to a book with certain pre-
conceptions, and it’s comforting (if not
stimulating) to find out that many of these
are confirmed. Indeed, much of the book
essentially confirms conventional wisdom,
albeit carefully, with all appropriate cave-
ats. This is especially true when it comes
to examining the consequences of exchange
rate regimes, where the authors experience
some empirical success, in contrast to their
work on regime causes. For instance, they
find that Mundell’s trilemma works, but not
nearly as tightly in practice as in theory; a
nontrivial amount of monetary autonomy
seems to remain even for countries with
fixed exchange rates and open capital mar-
kets. Klein and Shambaugh estimate that
TABLE 1
Coherence of Methodologies to Code Exchange Rate Regimes
IMF
Levy-Yeyati &
Sturzenegger
Reinhart &
Rogoff Shambaugh

IMF 100%
Levy-Yeyati and Sturzenegger 59% 100%
Reinhart and Rogoff 59% 55% 100%
Shambaugh 68% 65% 65% 100%
Notes: Taken from table 3.3 of Klein and Shambaugh (2010).
Entries are percentages of observations where
different methodologies agree. All classifications are collapsed
to three categories: pegged, intermediate, and
floating.
2011)656
when an anchor country (the United States)
raised interest rates, peggers (Hong Kong)
take almost eight months to adjust their own
interest rates even halfway. This seems like
more monetary sovereignty than most fix-
ers experience in practice.3 More intuitively,
countries that tightly link their currencies
experience substantially more trade as a
result; what reasonable person could dispute
that?4 Peggers may also have somewhat less
inflation than nonpeggers, though the effect
is small and uncertain. And the authors find
no compelling linkage between the exchange
rate regime and economic growth, consistent
with monetary neutrality. All these are emi-
nently reasonable and defensible positions,
indeed, infuriatingly so for a reviewer. In this
book, the authors have largely ratified what
is now not only conventional wisdom but also

official wisdom; most of this book fits com-
fortably with the IMF’s view on exchange
rate regimes (Atish R. Ghosh, Jonathan D.
Ostry, and Charalambos G. Tsangarides
2010; Rogoff et al. 2004).
Several of the strengths of the book are
worth highlighting. As already mentioned,
lots of the problems examined in this area
have proven too thorny for economists; the
area is filled with negative results. This could
have resulted in considerable “publication
bias,” as journals tend not to be interested in
negative results. The authors are to be com-
mended for avoiding this selection problem
in their literature reviews; one notices a large
number of unpublished working papers in
the references. Also, the authors attempt
an admirable amount of extensive sensitiv-
ity analysis to ensure that key results are
robust with respect to using different classi-
fications of exchange rate regimes, handling
3 When Wim Duisenberg was the governor of the
Dutch central bank, he earned the nickname “Mr. Fifteen
Minutes” because he quickly followed any interest rate
changes made by the Germans.
4 Some actually; check out Michael W. Klein (2005).
simultaneity, cutting the sample by stage of
development, and so forth.
That said, the choice to use Shambaugh’s
exchange rate regime classification scheme
as the default is natural for the authors,

but still seems questionable to me. This
scheme classifies a country as pegged if
the official exchange rate has varied by less
than + –2 percent over the last two years;
otherwise it is nonpegged. It seems odd to
distrust a country’s de jure exchange rate
regime data, but simultaneously to trust its
de jure exchange rate data. Consider the
case of Bolivia. From October 1972 through
November 1979, the official exchange rate
was fixed at 20.0 Bolivianos per dollar; this
then rose to 24.5 through February 1982.
During the same period of time, there were
multiple exchange rates, a fact that seems
unsurprising since cumulative inflation dur-
ing that period of time was approximately
600 percent. It was just such grounds that
lead Reinhart and Rogoff to use black market
exchange rates in their “natural” exchange
rate regime classification; they classify
Bolivia as “freely falling” for much of the
same period. But Shambaugh’s classification
has it as fixed (aside from the 1979 devalua-
tion). I’d also prefer a measure of exchange
rate regimes to control explicitly for the
shocks that hit the economy during the time
(as do Levy-Yeyati and Sturzenegger). I
dropped a draft of this review on the ground
outside today and it didn’t move. Shambaugh
would classify it as pegged; I’d say that there
was no wind to move it. This isn’t to say that
Shambaugh’s classification isn’t the best one
available, and best is what counts. But best
may not be very good.
4. Gripes

A fixed exchange rate policy is well under-
stood by bankers, practitioners, and academ-
ics around the world; one knows what the
central bank does. But what’s the alternative?
Floating is not a well-defined monetary
policy. If the central bank doesn’t fix the
exchange rate, it has to do something else—
but what? The academic profession should
move away from considering “Exchange
Rate Regimes” and instead classify countries
by “Monetary Policy Frameworks.”5 Some
countries that float adhere to a clear policy
of having an independent central bank target
inflation (New Zealand, Sweden, Chile, . . .).
But not all; some countries target money
growth (Nigeria), and others have what can
be referred to as opaque monetary policy
(what is it that the Bank of Japan targets?). Is
it reasonable to lump all nonfixers together?
Perhaps one reason that the authors find
weak results when comparing peggers with
others is that the latter group is a heteroge-
neous mess.
A second grumble is that transitions
between exchange rate regimes are essen-
tially ignored by Klein and Shambaugh. One
thing we know with confidence is that most
exchange rate regimes do not remain fixed
forever. When a pegger switches to a float,

it often does so during a dramatic currency
crisis (United Kingdom, Italy, and Sweden
in 1992; Mexico in 1994; Indonesia, Korea,
and Thailand in 1997; Russia in 1998; Brazil
in 1999; Argentina in 2002, . . . ). The inter-
national finance profession is somewhat
obsessed by such events, which have been
much studied over the last few decades,
starting with seminal work by Krugman (for
which, in part, he was awarded the Nobel
prize). The book does cover some of this
ground by using statistical hazard models to
estimate probabilities that fixers will float and
vice versa, but the analysis is mechanical and
almost devoid of economics. Can one really
compare the characteristics of exchange
5 In doing so, we would catch up with the IMF, which
has done this for years; http://www.imf.org/external/np/
mfd/er/index.asp.
rate regimes while avoiding the transitions
between them?
An empirically oriented book on exchange
rate regimes aimed at this audience should
really provide more institutional detail, so
that the reader can learn, at least superfi-
cially, how fixed exchange rate regimes work
in practice. For instance, the operation of
fiscal policy is dramatically affected by the
exchange rate regime; in turn, fiscal policy is
often constrained by the regime. This is an
issue of enormous policy interest, especially
in Europe and Latin America. However
“fiscal” does not even enter the index of

the book. More importantly, there should
be more descriptive history of the evolu-
tion of the international monetary system.
The “modern era” of exchange rate regimes
includes a large number of distinct exchange
rate regimes that go unmentioned by the
authors:
• The Latin pegs that were key to the dis-
inflation programs of Argentina, Brazil,
Chile, and others.
• The implicit Asian pegs of the 1990s
that existed during the run-up to the
crisis of 1997–98.
• The enduring pegs which continue to
define the exchange rate regimes of
Central, Western, and Southern Africa.
• The ongoing system of fixed exchange
rates in Europe; all entrants to the
Eurozone are required to remain fixed
to the Euro for at least two years before
accession.
• Finally, some of the current floats are
quite “clean” with a large number of
countries targeting inflation and abstain-
ing from foreign exchange interven-
tion almost obsessively (New Zealand,
Canada, and the United Kingdom).
I try to fill in some of these gaps below.
Finally, there is the scope of the exercise.

To me, most seriously fixed exchange rates
2011)658
(such as those of Denmark, Hong Kong, or
Latvia) seem too constraining to be worth-
while; why not go all the way to currency
union and give up monetary sovereignty (as
countries do when they join the euro)? On
the other hand, floating exchange rates seem
far more volatile than any reasonable model
would indicate, and this volatility seems
undesirable and unnecessary. How then
should one choose in practice between fixing
and floating? Such questions are not clearly
answered in this book; indeed they are not
even asked. This is not because they ignore
some large segment of the literature; the lit-
erature has little of value to say.
5. The Authors’ Trilemma
Any book that seeks to conduct a schol-
arly review and extension of a broad topic,
as this one does, faces a trilemma: it can be
comprehensive, balanced, or interesting,
but not all three. Suppose it is balanced and
compelling, providing a single coherent and
interesting viewpoint in a fair-minded way.
In this case, it simply cannot be a compre-
hensive review of all the relevant territory,
since discordant notes will inevitably have
been omitted. On the other hand, a book

may be comprehensive and interesting, but
then it cannot be impartial; evidence must
be unfairly discounted to ensure that every-
thing fits into a single mindset. Klein and
Shambaugh have chosen the first two desir-
able characteristics, and their book is both
impartial and complete. Sadly, this comes at
the cost of excitement and clarity; the weak
results and caveats tend to leave the reader
with mush.
Exchange Rate Regimes in the Modern Era
is a wide-ranging and fair-minded but bland
book. Did the authors make the right choice
in the trilemma? I think that the answer is
probably yes; the book fills a gap in the lit-
erature. So the authors have done a service
to the profession by providing us with this
book. Still, the balance and scope of the
endeavor comes at the cost of presenting a
single gripping viewpoint; the authors tend
to eschew black and white when grey will
suffice. Two Cheers!
6. The Fix We’re In
I proceed now by following the layout
of the book, but deliberately give up any
attempt at being comprehensive. I begin
with a selection of some of the grosser styl-
ized facts that we know about the incidence
of exchange rate regimes; these findings
are complementary to those presented by
Klein and Shambaugh. I then discuss both
the causes and consequences of exchange

rate regimes. I conclude by moving the dis-
cussion up a level, and questioning whether
the habitual call for further research is war-
ranted in this case.
6.1 The Importance of Different Exchange
Rate Regimes
Many countries in the world maintain fixed
exchange rates, indeed, usually a majority of
them (though this depends on time and the
exact classification scheme). The prevalence
of fixes seems clear from figure 1, which
splits up the countries of the world into one
of three exchange rate regimes (fixed, inter-
mediate, and floating), using the four differ-
ent popular classification systems. It seems
clear that over the modern era, as during
the preceding Bretton Woods era, fixing has
been the exchange rate regime of choice.
Many, if not most, of the countries in the
world fix their exchange rates.
I began this review by stating that the
exchange rate is an unusual asset price in
that it has official regimes of volatility. But
it is also unusual in another respect; it is the
most heavily traded asset price. The most
recent reliable data we have on foreign
exchange turnover was collected in April
2010. The BIS reports in its Triennial Survey

that at that point average daily turnover was
approximately $4.0 trillion. By way of com-
parison, daily turnover on the twelve deep
stock and derivative exchanges collectively
operated by NYSE Euronext in April 2010
was an order of magnitude lower at approxi-
mately $75 billion.6
The volume of trading in foreign exchange
markets is closely linked to the exchange
rate regime, since almost all the activity
occurs between currencies that are float-
ing. Table B.6 of the 2007 BIS report shows
that more than 97 percent of turnover
was generated between pairs of floating
6 See http://www.nyxdata.com/nysedata/asp/factbook/
viewer_edition.asp?mode=table&key=3133&category=3.
currencies.7 More generally, a bunch of the
countries with fixed exchange rate regimes
just aren’t that big. Figure 2 divides global
GDP (taken from the Penn World Table
6.3) into different exchange rate regimes.
Where figure 1 splits countries into different
regimes, figure 2 looks at the distribution of
real output across regimes. It also uses cur-
rencies instead of countries as the unit of
measurement, since a number of countries
are in currency unions and so do not have a
national money (sixteen countries currently
7 The comparable times are not yet available for the
2010 survey. However, the data available from the BIS,
particularly tables 3 and 4 (available at http://www.bis.org/
publ/rpfx10.htm) indicate that over 95 percent of foreign

exchange activity is still between pairs of floating exchange
rates.
100%
50%
0
100%
50%
0
100%
50%
0
100%
50%
0
1970 1980 1990 2000 2010 1970
1980 1990 2000 2010
1970 1980 1990 2000 2010 1970
1980 1990 2000 2010
Peg
Nonpeg

Fix
Intermediate
Float
Intermediate
FloatFloat
Intermediate
Fix
IMF De Jure Levy-Yeyati
and Sturzenegger
Shambaugh
Reinhart and Rogoff
Fix
Figure 1: Dividing Countries of the World by Exchange Rate
Regime
2011)660
use the Euro, which floats). The message
from figure 2 is quite different from that
of figure 1. During the modern era, only a
small fraction of world output has been pro-
duced in economies with fixed rates. It is

easy to overstate the real importance of fixed
exchange rate regimes.8
8 If you squint at the top left diagram of figure 1 in just
the right way, you might pick out a tendency for the de
jure intermediate exchange rate regimes to shrink through
the late 1990s. This was known as the problem of the “dis-
appearing middle,” a much-discussed idea at the turn of
the century. However, the signs of the disappearing middle
seem to vanish themselves when one uses a de facto classi-
fication scheme, as shown by the other graphs in the figure.
Perhaps more importantly, most of the economy simply
isn’t in intermediate regimes, if one weights by GDP, as
shown in figure 2.
6.2 Regime Durability
Another striking fact about exchange rate
regimes is that they have become more
persistent. Starting in the 1990s, the world
saw a series of wild currency crises, begin-
ning with the European Currency Crisis of
1992–93 and culminating in the Argentine
devaluation of 2002. But there has not been
a currency crisis of comparable importance
since, despite the global “Great Recession”
of 2008–09. Figure 3 shows the proportion of
global GDP in economies that have changed
their exchange rate regimes during the
past year. The message of figure 3 is clear;
switches in exchange rate regimes have now
become rare. Part of the reason why econo-
mists like Klein and Shambaugh no longer
100%

50%
0
1970 1980 1990 2000 2010 1970
1980 1990 2000 2010
100%
50%
0
100%
50%
0
100%
50%
0
1970 1980 1990 2000 2010 1970
1980 1990 2000 2010
IMF De Jure Levy-Yeyati
and Sturzenegger
Shambaugh
Reinhart and Rogoff
Float Float

Float
Intermediate Intermediate
Intermediate
Fix
Fix
Fix
Peg
Nonpeg
Figure 2: Dividing Output of the World by Exchange Rate
Regime
study currency crises much is that they’re
becoming history.
6.3 Does Size Matter?
It is easy to think that a country’s size (pop-
ulation) affects its choice of exchange rate
regime, but difficult to imagine the opposite.
Creating and maintaining a central bank with
its own monetary policy is a cost, one that
will weigh more heavily on a small economy.
Many economies with fixed exchange
rates are, in fact, small. Then again, there are
an awful lot of small economies. Berkeley,

California has a larger population than 49 of
the 237 “countries and other entities” listed
on the CIA’s widely used World Factbook,
many of which are included in the various
exchange rate classifications (I refer to these
all as “countries” for convenience). Still,
there is no doubt that the smallest countries
of the world do not have floating currencies.
(Indeed, a large number of the minnows
don’t even have their own currencies; at the
time this paper was written, 95 of the CIA’s
listed countries did not have a currency of
their own.) But one can overstate this argu-
ment; countries do not have to be very large
at all before creating a floating currency.
Small countries that do not fix include: the
Seychelles (population 88,000 in June 2010),
Tonga (123,000), and Sao Tome and Principe
(176,000).
Figure 4 compares the size distribution
of fixers and nonfixers in 2004 (the last year
1970 1980 1990 2000 2010
1970 1980 1990 2000 2010
0.6
0.4
0.2
0
IMF De Jure Levy-

Yeyati and Sturzenegger
Shambaugh
Reinhart and Rogoff
0.6
0.4
0.2
0
0.6
0.4
0.2
0
0.6
0.4
0.2
0
1970 1980 1990 2000 2010
1970 1980 1990 2000 2010
Figure 3: Dividing Output of the World by Economies with
Changes in Exchange Rate Regimes

2011)662
for which the Levy-Yeyati and Sturzenegger
and Shambaugh data are available). It graphs
the quantiles of log-population for fixers in
2004 (on the y axis) against comparable data
for nonfixers (on the x axis). A diagonal line
is provided for reference; if population were
similarly distributed across fixers and nonfix-
ers, the data would be plotted along the diag-
onal. In fact, the data are below the diagonal;
fixers tend to be smaller than nonfixers. As
already noted, fixing is especially popular for
small countries. You might ask: How small?
The answer is: quite small. There seems to
be a kink in the data where country size starts
to make much less of a difference; the ver-
tical line marks a country size of 2.5 million
people (around the size of Kuwait or Latvia).
Countries much larger than that are more
reluctant to fix, and when a country’s popu-
lation reaches the 10 million of Tunisia or
Hungary, the distribution of countries is quite
similar across fixers and nonfixers (look for the
tick at 9.2 ≈ ln(10,000) on the x axis). There
are 135 countries with populations of greater
than 2.5 million, 75 of which have more than
10 million citizens. Size seems unimportant to
the exchange rate regime choice for countries
with even moderately sized populations.9
9 Accordingly, it is little surprise that the effect of coun-
try size on its exchange rate regime is usually insignificant

in statistical exercises. Klein and Shambaugh find size sta-
tistically insignificant at the 5 percent level in sixteen of
their nineteen regressions in chapter 5.
Of�cial IMF Levy-
Shambaugh
Reinhart and Rogoff
14
9
4
F
ix
14
9
4
F
ix
14
9
4
F
ix

14
9
4
F
ix
4 9 14
Non�x
4 9 14
Non�x
4 9 14
Non�x
4 9 14
Non�x
Figure 4: Who Fixes? The Size Distribution of Countries:
Quantile Plots of Logs 2004 PWT 6.3 Population
So the size of a country affects its exchange
rate regime choice, but only a little. Very small
countries tend to fix, but size is irrelevant for
a wide range of countries. This should come
as no surprise; China, the largest country in
the world has (controversially) maintained a
fixed exchange rate regime for years.

6.4 How about Income?
It is even more difficult to find an empiri-
cal link between a country’s income and its
exchange rate regime. Some of the rich-
est countries in the world maintain fixed
rates (Brunei, Qatar), while others float
(Norway, the United States). Similarly there
are extremely poor countries that float (DR
Congo, Burundi), but some fix (Central
African Republic, Guinea-Bissau). This styl-
ized fact is general, as shown in figure 5.
Figure 5 is the analogue to figure 4 but
instead of graphing a country’s population, it
focuses on country real GDP per capita. The
quantile plots for fixers and nonfixers lie close
to the diagonal line, indicating that there are
few systematic differences between them.10
The level of a country’s real income has little
systematic correlation with its exchange rate
regime.
10 This fact can also be corroborated more rigorously
with Kolmogorov–Smirnov tests, which do not reject
the equality of income distribution across exchange rate
regimes at standard confidence levels.
Of�cial IMF Levy-
11
10
9

8
7
6
F
ix
6 7 8 9 10 11
Non�x
11
10
9
8
7
6
F
ix
11
10
9
8
7
6
F
ix
11
10
9

8
7
6
F
ix
6 7 8 9 10 11
Non�x
6 7 8 9 10 11
Non�x
7 8 9 10 11
Non�x
Shambaugh
Reinhart and Rogoff
Figure 5: Who Fixes? The Income Distribution of Countries:
Quantile Plots of Logs 2004 PWT 6.3 Real
GDP Per Capita
2011)664
6.5 More Stylized Facts
Where economies do maintain fixed
exchange rates, they are now usually fixed
to one of two major anchor currencies: the
American dollar or the Euro.11 The attrac-
tions of the dollar are particularly strong.
According to the most recent IMF data, 66

economies (out of 192 classified) used the
dollar as an exchange rate anchor. It seems
implausible that so many countries from so
many parts of the world could be motivated
to support a dollar link because of interna-
tional trade.
Some small rich economies fix (Hong
Kong). Some large poor countries fix
(Ukraine). But all large rich economies
float. The three most important curren-
cies in the world are the U.S. dollar, the
euro, and the Japanese yen; all float. Other
largish rich economies float as well (the
United Kingdom, Canada, Australia, and
Switzerland), as do many of the biggest and
most important emerging economies (Brazil,
India, Indonesia, Korea, Mexico, Russia, and
Turkey). China has a big economy and fixes;
it is the exception.
Regions differ, especially among develop-
ing countries. Sub-Saharan African countries
(especially former French colonies) like to
peg; central Europeans and Asians do not.
Oil exporters fix. Most OPEC members
maintain de jure and de facto fixed exchange
rates. That is especially true of OPEC mem-
bers in the Arabian Gulf, of whom a major-
ity fix (Saudi Arabia, Qatar, United Arab
Emirates).
Small Financial Centers fix. Most offshore
financial centers of the world maintain fixed
exchange rates. Countries like Aruba, the

11 Before the euro came into existence, a large number
of African countries were fixed to the French franc, which
was in turn fixed to the German deutschmark, the previous
European monetary anchor.
Bahamas, and the Caymans are small, so this
is little surprise.
Inflation Targeters Float, Often Quite
Cleanly. Twenty-six countries now use
inflation targeting as their monetary policy
framework; they often float with little
intervention. Consider the exchange rate
regimes of a few of the earliest converts.
New Zealand began its current float in 1985
and has intervened once since (in June
2007). Canada last intervened in the foreign
exchange markets in 1998. Chile floated in
1999 and has only intervened rarely since.
The United Kingdom has not intervened
since the Bank of England acquired its
independence in 1997.
Nominal Exchange Rate Volatility means
Real Exchange Rate Volatility. Mussa (1986)
convincingly demonstrated that countries
that float and accordingly experience more
nominal exchange rate volatility also have
more real exchange rate volatility. This char-
acterization has been corroborated by oth-
ers (Marianne Baxter and Alan C. Stockman
1989), and never seriously challenged for
low-inflation economies; it is now widely
accepted. It is easy to understand if nominal
prices are sticky, and indeed Mussa found

little difference in behavior of aggregate
prices across exchange rate regimes.
6.6 Summary: A Stylized Description
A disproportionate number of the small-
est countries of the world maintain fixed
exchange rates. But beyond that, size
has little effect on regime choice, while
income has none at all. So fixed exchange
rate regimes characterize a large num-
ber of countries but a small proportion of
global GDP and market activity. Switches in
exchange rate regimes are becoming rare.
Countries that do fix tend to peg to the dol-
lar, although the Euro also has a set of its
own peggers. Oil exporters, offshore finan-
cial centers, sub-Saharan Africans, and for-
mer French colonies tend to fix; inflation
targeters, former Soviet Bloc members, and
large rich economies do not.
7. Causes: How Do Countries Choose
Exchange Rate Regimes?
7.1 Friedman’s “Daylight Savings”
Argument
Milton Friedman (1953) provided one of
the most famous arguments for why all coun-
tries—at least those with low or moderate

inflation—should opt for floating exchange
rates. He wrote:
The argument for flexible exchange
rates is, strange to say, very nearly iden-
tical with the argument for daylight sav-
ings time. Isn’t it absurd to change the
clock in summer when exactly the same
result could be achieved by having each
individual change his habits? All that
is required is that everyone decided to
come to his office an hour earlier, have
lunch an hour earlier, etc. But obviously
it is much simpler to change the clock
that guide all than to have each individ-
ual separately change his pattern of reac-
tion to the clock, even though all want to
do so. The situation is exactly the same
in the exchange market. It is far simpler
to allow one price to change, namely the
price of foreign exchange, than to rely
upon price changes in the multitude of
prices that together constitute the inter-
nal price structure. (p. 173)
Friedman’s argument is that nominal price
stickiness implies that relative price adjust-
ment is easier to achieve through nominal
exchange rates than through prices. This
argument is still widely seen as a power-
ful argument for floating exchange rates. It
shouldn’t be. We only adjust our clocks twice
a year, by precisely one hour (unless you’re
in Arizona or Hawaii, in which case you don’t
adjust your clock at all). The one thing we

know about floating exchange rates is that
they are volatile, as pointed out by Mussa
(1986) and Baxter and Stockman (1989). If
we had to adjust our clocks by a different
amount daily, we might well choose to adjust
times instead of clocks.
7.2 National Determinants of the Exchange
Rate Regime Theory
Mundell’s trilemma implies that the real
consequences of different types of shocks
should, in principle, depend on the exchange
rate regime. A benevolent government
should choose the exchange rate regime so
as to maximize its insulating effects. This
leads one to the conclusion that countries
experiencing a lot of real shocks should
choose floating exchange rates; the pres-
ence of nominal rigidities means that relative
price flexibility is easier to achieve under a
float. On the other hand, countries suffer-
ing mostly from financial shocks will tend to
adopt fixed rates. As Stockman (2000) writes,
“the evidence supporting the predictions of
these models is only slightly better than the
evidence for cold nuclear fusion” so it does
not seem worthwhile to pursue this line
further.
Happily, Klein and Shambaugh do not
rely only on this theory. A fixed exchange
rate is a transparent, easily monitored mon-
etary anchor. As such, targeting the exchange
rate might provide credibility to a young or
troubled central bank. That’s especially true

if a country with an inflationary reputation
fixes itself to the money of a foreign central
bank with a reputation for low inflation (read
“the Fed” or its European equivalents, the
German Bundesbank and now the ECB).
But perhaps not; Aaron Tornell and
Andres Velasco (2000) provide an interest-
ing theoretical counterargument. Their
view is that fixed exchange rates induce fis-
cal indiscipline since lax policy eventually
leads to a costly collapse of the exchange
rate. However, bad behavior can be manifest
2011)666
sooner if the exchange rate is floating and
can immediately reflect unsound policy.
Thus Tornell and Velasco argue that flex-
ible exchange rates provide more discipline.
Their argument is powerful since many fixed
exchange rates have collapsed, often under-
mined by fiscal indiscipline. So political
economy arguments that model imperfect
monetary credibility have weak predictions
for the exchange rate regime; a country with
poor institutions can either fix or float. Is an
exchange rate constraint always easier for a
developing country to respect than another
type of monetary constraint, such as an infla-
tion target? This is clearly a matter that can
only be sorted out empirically.

There are also microeconomic arguments
relevant to exchange rate regime choice.
Transactions costs are lowered with fixed
exchange rates. It might seem hard to believe
that such benefits are big, but fixes do seem
to result in greater trade in practice (as chap-
ter 9 of the book shows), and very small
countries with correspondingly large trade
do have a strong tendency to fix. Fixes also
tend to lower the cost of foreign exchange
risk, although the latter can be inexpensively
hedged if the country has the appropriate set
of derivative markets. And of course, a fix
also decreases the incentives to reduce for-
eign exchange risk, so that departures from
fixes might be inordinately costly.
In principle, the microstructure of the for-
eign exchange market might provide an argu-
ment for official intervention to smooth or fix
the exchange rate; see Alexander Guembel
and Oren Sussman (2004). This seems cur-
rently like a theoretical argument of little
practical relevance. Governments certainly
provide liquidity to the market in the course
of smoothing the exchange rate and provide
insurance to some of its participants; the
private market also changes as a response
(William P. Killeen, Richard K. Lyons, and
Michael J. Moore 2006). So market micro-
structure may well provide a justification for
intervention in poor economies with thin
financial markets. But as shown above, these
economies do not fix disproportionately, and
their governments rarely cite microstructure

in justifying their policies. Further, some
rich economies with sophisticated financial
markets (like Hong Kong and Denmark) fix
their exchange rates. Also, fixers do not usu-
ally intervene in other asset markets that suf-
fer from problems similar to those of foreign
exchange, such as those for equities or long
bonds. The most compelling argument for
the rising popularity of microstructure argu-
ments is not that they seem plausible, but
that macroeconomic models are inadequate.
7.3 Empirics
If the theories for exchange rate regime
determination sound a little lame, that is
appropriate. It is generous to character-
ize the empirical performance of existing
models as “poor.” We currently have little
understanding of the time-series variation of
exchange rate regimes (why did Sweden float
out of its fix in November 1992 as opposed to
some other time?). Most plausible theories
of exchange rate determination depend on
slow-moving macroeconomic phenomena,
so that it may not be that surprising that our
models explain little variation over time. But
our ignorance of exchange rate regime deter-
minants across countries is downright embar-
rassing. One might imagine that we know
why the United States floats and Estonia is
fixed—but no. Very small countries, autoc-
racies and former colonies are more likely
to fix, but these factors collectively explain
little variation in exchange rate regimes.
Our attempts to explain the cross-coun-

try incidence of fixed exchange rates have
thus far basically failed. If one assembles a
panel of data, the between-country variation
explained by country-specific fixed effects is
much larger than any within-country time-
series variation linked to fundamentals. For
instance, the R2 in the panel regressions that
Klein and Shambaugh report in chapter 5
more than triple as country fixed effects are
added. But they, like others, are unable to
link this substantial variation across countries
to reasonable predictors of the exchange rate
regime. The fixed effects represent features
of an economy that are unobservable and
cannot be modeled empirically; they reveal
little of economic interest.12
Jeffrey A. Frankel (1999) states clearly that
no single exchange rate regime is appropri-
ate for all countries or at all times. The data
indicate that he is right; countries make dif-
ferent choices. But that does not explain why
it has proven impossible for our profession to
determine the characteristics that lead one
country to choose one regime at one point
and another later on, or why different coun-
tries make different choices. The nature of
how countries choose their exchange rate
regimes remains essentially an empirical
mystery.

8. Consequences: Why Should We Care
about Exchange Rate Regimes?
I now turn to the consequences of
exchange rate regime. Since any substantive
effect of the exchange rate regime on growth
would be important, that is where I begin.13
I start with some naive regression evidence.
In table 2, I report coefficients when
annual real GDP growth is regressed on the
exchange rate regime. The data span 178
economies from 1974 through 2007. There
are four rows of estimates, one for each
of the four popular exchange rate regime
12 One exception in this otherwise bleak set of results
is the fact that more autocratic countries are more likely
to have fixed exchange rates; J. Lawrence Broz (2002).
However, this statistically significant finding explains rela-
tively little of the underlying variation.
13 In the statistical work that follows, I temporarily treat
the exchange rate regime as exogenous. This does not seem
unreasonable, since exchange rate regimes seem to be dis-
tributed randomly in practice, as shown in the previous
section.
measurement systems. For each of the four
regressions, I include (but do not report) a
comprehensive set of time- and country-
specific fixed effects. However, no other
growth determinants are included; adding
controls for the savings rate, labor force
growth, institutions, and so forth is likely to
reduce the coefficients further. In each case,

I treat the fixed exchange rate regime as the
default regime, so that the top-left estimate
indicates that countries that were in narrow
crawl exchange rate regimes according to the
IMF’s classification grew some 0.8 percent
faster on average than fixers. Robust stan-
dard errors are included in parentheses.
Unfortunately no clear results emerge
from this simple exercise. The four meth-
odologies disagree on the effects of inter-
mediate exchange rate regimes. The official
IMF classification indicates that countries
in narrow crawls grow significantly faster
than fixers; Reinhart and Rogoff find the
opposite (a negative but insignificant result).
Symmetrically, where Reinhart and Rogoff
find that countries in wide crawls grow sig-
nificantly more slowly than fixers, the IMF
classification delivers a positive but insignifi-
cant result. Both of these regimes are com-
bined together into a single intermediate
measure by Levy-Yeyati and Sturzenegger,
who find a negative significant effect. None
of the methodologies finds that floating
exchange rate countries grow significantly
differently from fixers. The one strong result
is eminently plausible: the “Freely Falling”
basket cases grouped together by Reinhart
and Rogoff grow significantly more slowly
than fixers (or any other group for that mat-
ter). Then again, Reinhart and Rogoff define
freely falling regimes as those exhibiting
extreme macroeconomic distress and annual
inflation of over 40 percent. It seems fair to
conclude that this simple search finds little

linkage between growth and the exchange
rate regime. Correlation of course is not cau-
sation; here though, there is little correlation.
2011)668
One could go further, for instance by add-
ing extra controls for other growth determi-
nants, or splitting up countries by region,
stage of development, or whatever. Rogoff
et al. (2004), Ghosh, Ostry, and Tsangarides
(2010), and Klein and Shambaugh all pursue
this strategy; none finds a strong robust effect
of the exchange rate regime on growth.14
14 A different tack would be to examine macroeconomic
volatility, since one might think exchange rate regimes are
strongly associated with business cycle shocks and their
propagation. However, many authors including Baxter
and Stockman (1989) and Robert P. Flood and Andrew K.
Rose (1995, 1999) have found that there is essentially no
observable relationship between the exchange rate regime
and macroeconomic volatility. Consistent with this, in their
celebrated >400 page book This Time is Different (2009,
Princeton University Press) Reinhart and Rogoff (the cre-
ators of the Reinhart and Rogoff exchange rate regime
methodology) essentially never use data on the exchange
rate regime in their comprehensive study of financial
crises.
This is unsurprising. Choosing an exchange
rate regime is choosing a monetary policy. As
such, the exchange rate regime should have

little effect on real long-term growth, and it
does not appear to. As a monetary choice it
might however have implications for infla-
tion. These are examined in table 3, which is
the analogue to table 2 but considers (GDP
deflator) inflation.15
The results of table 3 indicate that there
is no clear relationship between inflation
and the exchange rate regime that spans all
countries, at least beyond the high inflation
observations grouped together by Reinhart
15 The sample is restricted somewhat; all deflationary
observations (where GDP deflation exceeding >10 per-
cent) have been removed, as have all countries that have
experienced a hyperinflation (>1000 percent inflation) in
the sample.
TABLE 2
Growth Effects of Deviations from Fixed Exchange Rate
Regimes
Classification Narrow Crawl
Wide
Crawl/Managed Float Falling
Official IMF 0.8*
(0.3)
0.5
(0.4)
0.2
(0.5)

Reinhart and Rogoff – 0.3
(0.4)
–1.0*
(0.5)
0.5
(1.2)
– 4.3**
(0.6)
Intermediate Float
Levy-Yeyati and Sturzenegger –1.5**
(0.4)
–0.5
(0.4)
Nonpeg
Shambaugh 0.3
(0.3)
Notes: Robust standard errors in parentheses; coefficients
significantly different from zero at 0.05 (0.01) level marked
by one (two) asterisk(s). Country and time fixed effects
included in all regressions but not recorded. Dependent
variable is annual real GDP growth from the Penn World Table
6.3. Each row represents a different OLS regression;
each coefficient represents the difference between the exchange
rate regime tabulated in the column head and a
fixed exchange rate.

and Rogoff in their “freely falling” category.
When floats are compared simply against
fixes, there is no significant difference.
Levy-Yeyati and Sturzenegger intermediate
regimes are significantly more inflationary
than their fixes, and Shambaugh’s nonfixers
are also more inflationary than his fixers. But
the IMF’s classification and Reinhart and
Rogoff cut the data up more finely and the
former (but not the latter) find that narrow
crawls have significantly lower inflation than
fixes, with no other significant results. These
results are consistent with the literature:
there is no consensus on any inflationary
consequences of exchange rate regimes for
typical economies.
Some have found that splitting the sample
up further by stage of development reveals
a result. In particular, developing coun-
tries with low-credibility institutions might
have lower inflation under pegs, as Klein,
Shambaugh and others have tried to demon-
strate. This seems plausible; acquiring mon-
etary credibility is difficult, especially for
poor countries. Even a positive finding in this
arena would be narrow; no one believes that
rich countries receive a free credibility lunch
of low inflation when they adopt a fix. But
the data seem to speak softly even for devel-
oping countries. The estimates of table 4 are

restricted to developing countries, and show
that the effect of fixed exchange rate regimes
on them depends sensitively on the pre-
cise measure of the exchange rate regime.
Succinctly, there is weak evidence that poor
fixers inflate more slowly.
TABLE 3
Inflation Effects of Deviations from Fixed Exchange Rate
Regimes
Wide
Official IMF –9.1**
(2.1)
2.7
(3.6)
8.8
(6.3)
Reinhart and Rogoff 0.4
(2.4)
0.8
(3.1)
7.9
(4.3)
62.**
(9.6)

Intermediate Float
Levy-Yeyati and Sturzenegger 18.4**
(3.1)
3.5
(1.9)
Nonpeg
Shambaugh 7.3**
(1.8)
included in all regressions but not recorded. Dependent vari-
able is annual GDP inflation from the Penn World Table 6.3.
All deflationary observations (GDP deflation exceed-
ing >10 percent) have been removed, as have all countries that
have experienced a hyperinflation (>1000 percent
inflation). Each row represents a different OLS regression; each
coefficient represents the difference between the
exchange rate regime tabulated in the column head and a fixed
exchange rate.
2011)670
In summary, there is scant evidence that
the exchange rate regime matters much for
anything real. This is believable; if there
were a strong, clear and important effect

of the exchange rate regime on growth, it
would already be part of conventional wis-
dom. After all, we care about such things,
and there is considerable variation in mon-
etary regimes across time and countries, so
that such effects would be easily visible.16
What is perhaps more surprising is how
weak are the inflationary consequences of
16 Consider a different question: why are certain coun-
tries rich? We know that richer countries tend to have
better institutions, are more open, are farther from the
equator, and so forth. There is much dispute about whether
exchange rate regimes. Results here tend to
be sufficiently sensitive to the exact sample
and measure of exchange rate regime that it
is hard to say anything with confidence. Such
weak correlations are just manifestations of
what Maurice Obstfeld and Rogoff (2001,
p. 373) call “the exchange-rate disconnect
puzzle,” which is: (italics in original) “the
exceedingly weak relationship between the
exchange rate and virtually any macroeco-
nomic aggregates.”
such correlations are causal, and which ones dominate,
but the point is that correlations that are strong and robust
are worth fighting over. If any such correlations existed for
exchange rate regimes, they would be well-known.
TABLE 4
Regimes in Developing Countries

Wide
Official IMF 1.2
(8.1)
1.5
(7.2)
7.5
(11.5)
Reinhart and Rogoff 3.3
(6.2)
1.4
(7.2)
14.1
(9.8)
54.2**
(13.3)
Intermediate Float
Levy-Yeyati and Sturzenegger 22.0**
(4.5)
7.3**
(2.4)
Nonpeg
Shambaugh 10.7**

(3.0)
included in all regressions but not recorded. Dependent vari-
able is annual GDP inflation from the Penn World Table 6.3.
All deflationary observations (GDP deflation exceed-
ing >10 percent) have been removed, as have all countries that
have experienced a hyperinflation (>1000 percent
inflation). Sample restricted to countries that are not “high
income” according to the World Bank and are not in the
MSCI Emerging Market Index. Each row represents a different
OLS regression; each coefficient represents the
difference between the exchange rate regime tabulated in the
column head and a fixed exchange rate.
9. Should We Soldier On?
Hong Kong is a small rich Asian economy
that has good institutions and is extremely
open. Singapore is another Asian economy
of roughly comparable size, income, insti-
tutions, and openness. Hong Kong prides
itself on having rigorously maintained a fixed
nominal exchange rate since 1983 through its
currency board arrangement. Singapore, on
the other hand, manages its monetary policy
through its exchange rate. The Sing dollar
has varied from S$2.25/$ to S$1.36/$ during
the decades that the HK$ has been steady at
HK$7.8/$. Why do such similar economies

choose such different approaches to mon-
etary policy? Denmark has stayed fixed to
the Euro (earlier, the Deutschemark) at the
same rate since 1987. Sweden has changed
its regime a number of times since then, and
now has a flexible exchange rate. Finland
has also changed its exchange rate regime
repeatedly, and has now relinquished inde-
pendent monetary policy to become a mem-
ber of the Eurozone. Yet Denmark, Sweden,
and Finland are broadly comparable in size,
income, institutions, and openness. The
examples are legion: Panama and Costa Rica
are also similar but Panama has remained
rigidly dollarized since 1903 while Costa
Rica has switched its exchange rate regime
frequently, and has now moved to a crawling
peg. Such countries have made radically dif-
ferent monetary decisions, without obvious
long-term consequences for output or infla-
tion, and there is no sign that their regimes
will converge any time soon. The fact that
similar economies make completely differ-
ent choices might lead one to despair; as a
profession, we have collectively made little
progress in understanding how countries
choose their exchange rate regimes. Still,
before panicking, one should first remember
that such choices often seem to have remark-
ably little consequence. Exchange rate
regimes are flaky: eccentric and unreliable.
The issue of exchange rate regimes is a
fascinating question, one that will surely
intrigue economists for the foreseeable
future. Still, to me the truly fascinating thing

about exchange rate regimes is that—they’re
fascinating. They really shouldn’t be. My
best friend likes tea, while I prefer coffee.
While this seems immaterial, one could,
in principle, figure out the reasons for our
preferences, and how they affect our lives.
Exchange rate regimes are much the same.
Governments of similar countries make dif-
ferent decisions on the exchange rate regime.
These views appear to be strongly held and
sincere, yet they seem to have neither dis-
cernible causes nor visible consequences.
Perhaps it is precisely because these issues
appear to be of purely academic interest that
they continue to provide inspiration for our
profession; the stakes could not be lower.
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1542476042813823Exchange Rate Regimes in the Modern Era:
Fixed, Floating, and Flaky1. What’s International about
International Finance?2. Who’s What?3. Scoring a Fix4.
Gripes5. The Authors’ Trilemma6. The Fix We’re In6.1 The
Importance of Different Exchange Rate Regimes6.2 Regime
Durability6.3 Does Size Matter?6.4 How about Income?6.5
More Stylized Facts6.6 Summary: A Stylized Description7.

Causes: How Do Countries Choose Exchange Rate Regimes?7.1
Friedman’s “Daylight Savings” Argument7.2 National
Determinants of the Exchange Rate Regime Theory7.3
Empirics8. Consequences: Why Should We Care about
Exchange Rate Regimes?9. Should We Soldier
On?ReferencesFiguresFigure 1: Dividing Countries of the
World by Exchange Rate RegimeFigure 2: Dividing Output of
the World by Exchange Rate RegimeFigure 3: Dividing Output
of the World by Economies with Changes in Exchange Rate
RegimesFigure 4: Who Fixes? The Size Distribution of
Countries: Quantile Plots of Logs 2004 PWT 6.3
PopulationFigure 5: Who Fixes? The Income Distribution of
Countries: Quantile Plots of Logs 2004 PWT 6.3 Real GDP Per
CapitaTablesTABLE 1 Coherence of Methodologies to Code
Exchange Rate RegimesTABLE 2 Growth Effects of Deviations
from Fixed Exchange Rate RegimesTABLE 3 Inflation Effects
of Deviations from Fixed Exchange Rate RegimesTABLE 4
Regimes in Developing Countries

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