Sovereign debt and the cost of migration: India 1990-1992

The international capital market integration and currency crises of the last decade have renewed the debate on optimal exchange rate regimes. Research is mixed regarding what their effect has been on the system of exchange rate regimes and the anchor currencies at the centre of the system. The debate is complicated by growing empirical evidence that the de jure regimes announced by governments often differ from the de facto regimes that are actually applied. In this paper we divide the period 1990-2002 according to the major crises and use the generalized method of moments to identify the individual de facto regimes and relevant anchor currencies for each sub-period. We find that although intermediate regimes as a percentage of the overall database remained stable over the three periods, the type of peg and anchor currencies varied considerably. Pegs on a single currency fell from 62% of the sample in the first period to 49% in the second period, then rose to 66% in the third period. Basket pegs rose from 33% in the first period to 51% in the second period and back to 34% in the third period. Independent floats disappeared after the first period. When we group countries according to their access to capital markets, we find that all nine of the developed countries in the sample followed some type of intermediate regime for all three periods. We also find a trend towards hard pegs in the group of countries that has managed to increase its integration in the international capital markets. Our results also suggest that the US dollar remains the main anchor currency in the international financial system, even after the major currency crises and the rise of the euro.