The Financial Development And Exchange Rate Regime Choices

Exchange rate regime choice is a major issure which a country must face in the the process of economic liberalization. Literature in general considers that the exchange rate arrangement depends on the size of a country's economy, trade patterns, foreign exchange reserves, ect.,and assums that a country's financial development is fixed in the exchange rate system selection process.This paper give up the assumption of the fixed level of financial development in this process,and adopt the exchange rate regime classification by RR and domestic credit in the proportion of GDP as the financial indicator.The paper finds the definite relation between that financial development and the exchange rate regime choice by statistical analysis, random effects model and fixed effects models.And from the perspective of corporate profits we explain how financial development effects the exchange rate regime choice.The combination of low level of financial development and floating exchange rate system would magnify the fluctuations in the profits,which then makes the firm much more difficult finance.In the long run it would affects the innovation capability and a country's productivity. Finally, we use STATA 11 for programming the well-known threshold model to very the quantitative relation of financial development on the threshold effect of exchange rate regime choice. We make a certain amount of innovation in the theme, interaction mechanisms, quantitative relations, research methods (threshold effect).