Better two eyes than one: A synthesis classification of exchange rate regimes

Abstract

This paper proposes a new de facto classification of exchange rate regimes, the synthesis classification. This framework offers several advantages over existing de facto classifications. First, it provides a unified framework that integrates the most divergent classifications, the RR and LYS classifications, not only achieving broader coverage but also encompassing a wide spectrum of exchange regimes. Second, it fits better with the historical developments of exchange rate regimes in the post-Bretton Woods era. Among others, it brings a nuanced perspective on the so-called hollowing-out hypothesis by showing that the evolution of de facto regimes —especially in emerging economies since the late 1990s— has essentially involved a shift toward more tightly “managed” intermediate regimes, rather than a move away from them. As an illustration of the insightfulness of our classification, we empirically revisit the relationship between currency crises and exchange rate regimes. Our classification not only associates a higher probability of currency crisis with both intermediate and floating regimes, but also shows better statistical performances in predicting currency crises compared to other classifications.