Democracy and De Facto Exchange Rate Regimes

Abstract

This paper explores the relationship between a country's political regime type and its de facto exchange rate fixity. It argues that more democratic regimes should be associated with less de facto fixity because the median voter is likely to be a domestically oriented producer with a monetary preference for domestic policy autonomy, requiring more a more flexible exchange rate regime. Focusing on a broad sample of countryyears in the post-Bretton Woods era defined by international capital mobility, the statistical results show that not only are more democratic regimes negatively associated with de facto fixity using three different operational measures for this dependent variable, but that this negative relationship gets stronger as the median voter is more likely to be a domestically oriented producer and as societal groups are more able to influence public policy.

The Effect of Authorita rian Regime Type on Exchange Rate Policy

“…37 We extend these selectorate-based theories of exchange rate regimes to the nondemocratic world and argue that authoritarian regimes with large selectorates should also avoid fixed exchange rates. 38 36 Bearce and hallerberg 2011;Broz 2002;frieden, ghezzi, and Stein 2001;leblang 1999;Simmons 1994; Singer 2010. one exception is frieden, leblang, and Valev's 2010 study, which found that democracies are more likely to fix their exchange rates in eastern europe. This anomalous result may be driven by the fact that most dictatorships in eastern europe are single-party regimes.…”

“…This anomalous result may be driven by the fact that most dictatorships in eastern europe are single-party regimes. 37 Bearce and hallerberg 2011;eichengreen 1996, chap. 1;leblang 1999;Simmons 1994;Singer 2010, 316.…”

“…43 Bearce and hallerberg 2011;leblang 1999;Simmons 1994. Situations of hyperinflation may be one rare case in which fixed exchange rates are widely supported.…”

The political economy of exchange rate regimes in transition economies

“…2 Theoretical arguments and empirical contributions have focused on a range of institutional measures and their connection to exchange rate regime choice. Leblang (1999) examines the role of democracy, Bearce and Hallerberg (2008) concentrate on political (in)stability, and Hall (2008) looks at the depth of democracy. All of these papers base their arguments on the logic of credible commitments and suggest that domestic political pressures can also work against the adoption of a flexible exchange rate.…”

The Political Economy of the Euro Crisis

“…IPE research has shown that the costs of sacrificing domestic economic goals in order to achieve exchange rate stability are particularly high for democratically elected policymakers (e.g. Bearce & Hallerberg, 2011;Broz, 2002;M. Hall, 2008;Sattler & Walter, 2010;Simmons, 1994), but that these costs also vary substantially across different political settings.…”