POLITICAL PRESSURES AND EXCHANGE RATE STABILITY IN EMERGING MARKET ECONOMIES

This paper presents a political economy model of exchange rate policy. The theory is based on a common agency approach with rational expectations. Financial and exporter lobbies exert political pressures to influence the government's choice of exchange rate policy, before shocks to the economy are realized. The model shows that political pressures affect exchange rate policy and create an over-commitment to exchange rate stability. This helps to rationalize the empirical evidence on fear of large currency swings that characterizes exchange rate policy of many emerging market economies. Moreove... Mehr ...

Verfasser: Massimo Giuliodori
Ester Faia
Michele Ruta
Dokumenttyp: Artikel
Erscheinungsdatum: 2008
Schlagwörter: EUTOPIA Alliance / Netherlands / General Economics / Econometrics and Finance
Sprache: Englisch
Permalink: https://search.fid-benelux.de/Record/base-29181531
Datenquelle: BASE; Originalkatalog
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Link(s) : https://www.openaccessrepository.it/record/97419

This paper presents a political economy model of exchange rate policy. The theory is based on a common agency approach with rational expectations. Financial and exporter lobbies exert political pressures to influence the government's choice of exchange rate policy, before shocks to the economy are realized. The model shows that political pressures affect exchange rate policy and create an over-commitment to exchange rate stability. This helps to rationalize the empirical evidence on fear of large currency swings that characterizes exchange rate policy of many emerging market economies. Moreover, the model suggests that the effects of political pressures on the exchange rate are lower if the quality of institutions is higher. Empirical evidence for a large sample of emerging market economies is consistent with these findings.