Herding and the shifting determinants of exchange rate regime choice

Abstract

It is difficult to pin down the factors that determine states’ choice of exchange rate regime because those very factors present a moving target. Many scholars have taken on the same question: what are the determinants of exchange rate regime choice? But as a group they have been unable to identify a stable answer. The reason for this is that the factors that best predict exchange rate regime vary dramatically across time. An explanation for this variation is offered: rational herding, or information cascades, can explain why one factor becomes prominent for a period of time then suddenly drops off and is replaced by a better predictor.

Keywords:

• exchange rate regimes
• herding
• information cascades
• economic behaviour

JEL Classification:

• F31
• F33
• P16

Acknowledgements

For useful comments, I would like to thank Benjamin J. Cohen, Martin Edwards, Benjamin Goldfrank and Sally Bates.

Notes

¹ See www.info-cascades.info, also Bikhchandani et al. (1992).

² The Gini index can be understood as one minus the sum of the square of the relative frequencies of each class (flexible or fixed).