Domestic institutions and exchange rate politics in the open economy
By: by José Fernández-Albertos
Published: 2007
Language: eng
Number of pages: 208
Description: This dissertation studies the link between economic openness and the politics of the exchange rate regime. Why does trade integration seem to lead to stronger preferences for fixed exchange rates in some cases, but for more flexible currency arrangements in others? To answer this question, the dissertation develops a model of exchange rate regime preferences in which the expected consequences of the exchange rate regime on the economic sectors' wellbeing are dependent on the presence of certain domestic macroeconomic institutions. The reason is that a fixed exchange rate regime has two different distributional effects: on the one hand, it stabilizes the nominal exchange rate, which benefits the international sector; on the other, it reduces the costs of wage militancy in the domestic-oriented sectors of the economy, which damages the exposed sector. The formal model shows that whether the former or the latter effect will prevail is a function of the domestic institutions in place: because both coordination of wage bargaining and the anti-inflationary monetary authorities reduce the magnitude of the second effect, the attitudes of exporters towards fixed exchange rate regimes will be context-dependent: they will support pegs if these institutions exist, but will prefer floats if they do not. Evidence on variation in exchange rate regime preferences from Mexico and the European Union corroborates these predictions.

The model of exchange rate preferences has a second (and perhaps more important) empirical implication. As the economy opens up, and the political clout of the international sector increases, governments' exchange rate policies are expected to diverge across institutional contexts: trade will be associated with fixed exchange rate regimes in countries with coordinated wage bargaining and conservative central banks, but with floats otherwise. Evidence on the adoption and duration of currency regimes since the 70s indicates that the effect of trade openness on exchange rate choices is indeed mediated by these two domestic macroeconomic institutions.
Notes: "February 2007."

Thesis (Ph.D., Dept. of Government)--Harvard University, 2007.

Includes bibliographical references.