The Determinants of Exchange Rate System: an Empirical Analysis

Since the breakdown of the Bretton Woods System, exchange arrangements of countries have become flexible. Several attempts have been made to determine whether the theories of optimum currency areas adequately explain the choice of an exchange rate system. In this paper, the optimum currency area is retested. Using cross-section data, a regression analysis of the choice of an exchange rate system is performed, applying ordered and multinomial logit techniques. An important result of this analysis is the failure to reject the hypothesis that flexibility is the latent variable underlying the exchange rate system.