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.

Published in 1999, this work analyzes the phenomenon of macroeconomic adjustment, with special emphasis on selected Latin American countries facing stabilization programmes. It provides a historical description of the origins, functioning and collapse of exchange-rate regimes from the international classical gold standard period to modern arrangements. The author supports the argument that systemic asymmetries in the worldwide adjustment mechanism are inherent in the international monetary system. The recent theoretical literature dealing with the rules vs discretion debate and its interaction with the credibility issue is reviewed. This topic is intrinsically related to the dispute over the appropriate role of exchange-rate anchors in disinflation programmes. Against a background of academic dispute between advocates of exchange-rate prescriptions and monetary conceptions, the contrasting views of different theorists regarding the choice of exchange rate regimes are presented and assessed. Finally, a comparative analysis of recent experiments in Argentina, Brazil, Chile and Mexico with exchange-rate based disinflation stabilization programmes is undertaken. The problems that have arisen while establishing new institutional arrangements, such as new currency or a policy rule for monetary base creation, are examined.

The debate about the choice of exchange rate regimes for developing countries has occupied a central stage in macroeconomic policy since the creation of the Bretton-Woods system back in 1944. Most importantly, the increased unofficial dollarization in Central America has determined the preference of exchange regimes by the regional monetary authorities. Since the regulation of monetary and financial markets in Central America, countries of the region have been impacted by a dramatic economic and financial crisis, which has been translated into long periods of inflation and sluggish growth of aggregate demand. In this context, governments have been motivated to migrate from flexible regimes towards a fixed regime (in some cases, hard peg). The argument is that this shift might led to enhance macroeconomic stability and reduced inflationary pressures.

Government exchange rate regime choice is constrained by both political and economic factors. One political factor is the role of special interests: the larger the tradable sectors exposed to international competition, the less likely is the maintenance of a fixed exchange rate regime. Another political factor is electoral: as an election approaches, the probability of the maintenance of a fixed exchange rate increases. We test these arguments with hazard models to analyze the duration dependence of Latin American exchange rate arrangements from 1960 to 1999. We find substantial empirical evidence for these propositions. Results are robust to the inclusion of a variety of other economic and political variables, to different time and country samples, and to different definitions of regime arrangement. Controlling for economic factors, a one percentage point increase in the size of the manufacturing sector is associated with a reduction of six months in the longevity of a country's currency peg. An impending election increases the conditional likelihood of staying on a peg by about 8 percent, while the aftershock of an election conversely increases the conditional probability of going off a peg by 4 percent.