Herding and the Shifting Determinants of Exchange Rate Regime Choice

Applied Economics, Volume 44, Issue 32

It is difficult to pin down the factors that determine states’ choice of exchange rate regime because those very factors present a moving target. Many scholars have taken on the same question: what are the determinants of exchange rate regime choice? But as a group they have been unable to identify a stable answer. The reason for this is that the factors that best predict exchange rate regime vary dramatically across time. An explanation for this variation is offered: rational herding, or information cascades, can explain why one factor becomes prominent for a period of time then suddenly drops off and is replaced by a better predictor.