Financial structure and fixed exchange rate regime: hypothesis and evidence from emerging market economies
(2.Institute of Chinese Financial Studies of SWUFE 611130)
【Abstract】With emerging market economies as the object of research, this paper examines the effects of financial structure on the choice of exchange rate regime. It is found that the more similar is one emerging market economy’s financial structure to the bank-based one, the more likely it is to adopt the fixed exchange rate regime; conversely, the more similar is one emerging market economy’s financial structure to the market-based one, the more likely it is to adopt more flexible exchange rate regime. Using a sample of 31 emerging market economies (1990–2010), this paper uses discrete choice models, including Probit, Logit, etc. , to perform test and verify theoretical hypothesis of this paper. The robustness tests, which take into account different measurements of financial structure, endogeneity, different divisions of fixed exchange rate regime, estimation of panel data of random effects and fixed effects parameters and different classification of exchange rate regime, also show that conclusions of this paper hold up.
【Keywords】 financial structure; exchange rate regime; emerging market economies;
. ① The emerging market economies refers to those that share some common characteristics among developing countries. Usually, these economies are characterized by the following features: income per capita is higher than that of other developing countries but lower than that of developed economies; domestic sectors are undergoing wide reform of economic liberalization; the capital account liberalization is faster than that of other developing countries. We divide emerging market economies based on the work of Fischer (2001). [^Back]
. ① According to estimation of Levy-Yeyati (2006), during 1970–2004, foreign currency deposits of banking sectors of many emerging market economies accounts for over 30% of total deposits (such as Bulgaria, Egypt, Peru, Poland and Turkey). High level of liability dollarization further strengthens preferences of emerging market economies’ banking sectors for stable exchange rate, because with liability dollarization, changes in exchange rate, especially devaluation of domestic currency, will bring an aggravated balance sheet. [^Back]
. ① In order to lay the foundation for construction of econometric model and choices of control variables in this paper, we review 35 papers of empirical studies during 1978–2014 (the references are available on request), and find that these studies have the following characteristics. (1) There are two problems in selection of sample in the existing literature: firstly, except the four papers (Edwards (1996), Calderón and Schmidt-Hebbel (2008), Levy-Yeyati et al. , (2010) and Berdiev et al. , (2012)), the other 31 articles do not subdivide types of economies, causing problems in conclusions, because effects of the same economic and political factors on different economies’ choices of exchange rate regime differ significantly (Levy-Yeyati et al. , 2010; Berdiev et al. , 2012). Secondly, except Güçlü (2008), the other 34 papers do not examine specially the emerging market economies’ choices of exchange rate regime. (2) Since Edwards (1996), explanatory variables and control variables in most literature include the OCA factors, macro, external and structural factors and political and institutional factors. (3) Empirical research mainly relies on binomial and multinomial Logit (or Probit) discrete choice models. Further analysis indicates that using binomial or multinomial discrete choice models has not significant effects on the research conclusions. (4) Empirical research has not reached a consensus on determinant factors for the choice of exchange rate regime: firstly, as far as one single variable is concerned, there is not any factor that is consistent with theoretical prediction and statistically significant in all empirical studies; secondly, theories after 1950s are not widely supported by empirical evidence. [^Back]
. ② The 31 economies include Argentina, Brazil, Bulgaria, Chile, China, Colombia, the Czech Republic, Ecuador, Egypt, Hungary, India, Indonesia, Israel, Jordan, South Korea, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Panama, Peru, the Philippines, Poland, Qatar, Russia, South Africa, Sri Lanka, Thailand, Turkey and Venezuela. [^Back]
. ① The new classification method of 1999 is deemed to be de facto classification method by some scholars. [^Back]
. ② The RR dataset covers the years from 1940 to 2010, and has both monthly data and yearly data, and both fine grid and coarse grid, which make it a widely used de facto classification method in empirical research. In contrast, the LYS dataset covers a shorter period (1974–2004), which limits its application in the study. [^Back]
. ③ Many emerging market economies are included in the developing countries. [^Back]
. ④ According to the definition of fixed exchange rate regime in this paper, if we use the RR fine grid, we will get the same final dataset. So we use the coarse grid to classify exchange rate regime. [^Back]
. ① In the sample of Reinhart and Rogoff (2004), 12. 5% of observations are classified into this type, and it is three times of percentage of free floating exchange rate regime (4. 5%). [^Back]
. ② It includes the following exchange rate regimes: no separate legal tender, pre announced peg or currency board arrangement, pre announced horizontal band that is narrower than or equal to +/−2%, and de facto peg. This method is used in many studies, such as Alesina and Wagner (2006), Méon and Minne (2014) and Steinberg and Malhotra (2014). [^Back]
. ③ We also use two other indicators as the proxy variable for financial development (credit to private sector + market value of equities/GDP (Bordo and Flandreau, 2001), which not only takes into account development of the banking sector but also considers development of stock market; M2/GDP (Bordo and Flandreau, 2001; von Hagen and Zhou, 2007), which is used to measure one country’s financial deepening level, is retested, and the results do not affect the conclusion of this paper (detailed results are available on request). [^Back]
. ① We also remove the abnormal observations of the currency shock indicator, and then re-perform all the tests, and the results do not affect the conclusion of this paper (detailed results are available on request). [^Back]
. ① Shambaugh (2004) and Faia et al. (2008) argued that the political variable is less likely to cause endogeneity. In addition, because data of the previous five years are used for estimation of real shocks and monetary shocks, it is not necessary to use lagged forms of these variables to conduct regression. Thus we also conduct regression with the current value of these variables and the results have no significant effects on the conclusion of this paper (detailed results are available on request). [^Back]
. ① The estimation results (Table 9) of fixed effects and random effects models given in the robustness test part of this paper show that the conclusions are not affected. [^Back]
. ② Legal origin is short for source or origin of the law, which is the social control for economic life (La Porta et al. , 2008). [^Back]
. ① Following the views of Bubula and Ötker-Robe (2002), von Hagen and Zhou (2007), Tavlas et al. (2008), Dubas et al. (2010), and Eichengreen and Razo-Garcia (2013), we classify managed floating into floating exchange rate regime. Because the RR coarse grid does not list separately managed floating, we only use the RR fine grid to subdivide exchange rate regime. [^Back]
. ① The conclusions are not affected if the freely falling and dual exchange rates with missing parallel market data are classified into floating exchange rate regime (detailed results are available on request). [^Back]
. ② Because the new classification method is deemed to be de facto classification method by some scholars, it is controversial in the academia whether the new classification method should be regarded as de jure or de facto classification method. [^Back]
. ① As we can see from Table 7 and Table 8, there are two reasons why the sample we use for regression has smaller size in the LYS classification: firstly, the dataset of the LYS classification covers a period till 2004; secondly, data are missing in the LYS classification. [^Back]
. ① Detailed regression results of the first stage are available on request. [^Back]
. ① The same conclusions are drawn from the test with the multinomial model (detailed results are available on request). [^Back]
. ② In the regression of fixed exchange rate regime with floating exchange rate regime as reference, the coefficient of fin2 is negative and statistically significant, but in the regression of intermediate exchange rate regime, the coefficient of fin2 is not statistically significant, so we do not compare the effects of fin2. [^Back]
. ① Detailed analysis about the effects of other economic and political variables on the choice of exchange rate regime are available on request. [^Back]
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