The politics of exchange rates in developing countries

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What factors determine a country's exchange rate regime? Since the collapse of the Bretton Woods system in 1973, economists have sought to answer this question. Early analyses emphasized optimum currency area (OCA) criteria, such as a country's size, trade openness, and factor mobility. More recent studies have focused on the types and sources of economic shocks and the imperfections in financial markets. Despite extensive research, there remains little consensus on the determinants of exchange rate regime choice. The existing literature has struggled to identify a single clear predictor, and significant discrepancies in exchange rate policies have been observed among economically comparable countries. This lack of conclusive findings has motivated further exploration into the role of political and institutional conditions in shaping exchange rate policies. Similar to other areas of economic policy, it is increasingly recognized that a government's macroeconomic preferences significantly influence policymaking and should be considered when analyzing macroeconomic outcomes.