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The Political Choice Of The Exchange Rate Regime

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  • L. J. RULAND
  • J.‐M. VIAENE

Abstract

The purpose of this paper is to present a model in which the choice of the optimal exchange rate regime is envisaged in a political setting. We consider a country whose voting population comprises three types of agents, importers, exporters and speculators, who select their position on exchange rate policy according to welfare maximization. As a result, well‐defined interest groups are shown to emerge. Each coalition makes contributions to one of two political candidates running for political office in support for their optimal policy intervention. When policy pronouncements by the two candidates are made in terms of exchange rate volatility, the equilibrium consists of two extremes: a fixed versus flexible exchange regime, the latter with bounded volatility [JEL D72, F31].

Suggested Citation

  • L. J. Ruland & J.‐M. Viaene, 1993. "The Political Choice Of The Exchange Rate Regime," Economics and Politics, Wiley Blackwell, vol. 5(3), pages 271-284, November.
    • Handle: RePEc:bla:ecopol:v:5:y:1993:i:3:p:271-284
    DOI: 10.1111/j.1468-0343.1993.tb00079.x
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    References listed on IDEAS

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    1. Robert C. Feenstra & Jon D. Kendall, 1991. "Exchange Rate Volatility and International Prices," NBER Working Papers 3644, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Hans Grüner & Carsten Hefeker, 1996. "Bank cooperation and banking policy in a monetary union: A political-economy perspective on EMU," Open Economies Review, Springer, vol. 7(3), pages 183-198, July.
    2. Iljoong Kim & Inbae Kim, 2005. "Endogenous changes in the exchange rate regime: A bureaucratic incentive model," Public Choice, Springer, vol. 125(3), pages 339-361, December.
    3. Pierre-Guillaume Méon & Jean-Marc Rizzo, 2002. "The Viability of Fixed Exchange Rate Commitments: Does Politics Matter? A Theoretical and Empirical Investigation," Open Economies Review, Springer, vol. 13(2), pages 111-132, April.
    4. Kofman, Paul & Viaene, Jean-Marie, 2000. "The demise of commodity price agreements: the role of exchange rates and special interests," European Journal of Political Economy, Elsevier, vol. 16(4), pages 775-805, November.

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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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