The Political Economy of Currency Pegs

The aim of the paper is to explain exchange rate regimes declared by IMF members in a political economy perspective. We extend the traditional analysis of exchange regime choice (mainly based on optimal currency area theory and financial integration approach) by introducing in our empirical work the influence of sectoral interests via organized groups. In addition to traditional economic factors examined in numerous studies (size of economy, openness, inflation, foreign reserves and so on), our econometric works introduce indicators of group political effectiveness. We have found that political economy factors have played an important role on exchange regime choice of less-advanced countries.