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The Politics of Speculative Attacks in Industrial Democracies

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  • Leblang, David
  • Bernhard, William

Abstract

Recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack. We argue that political processes and partisan objectives inform expectations about the government's commitment to the exchange rate. First, market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse. Second, party labels provide information to currency traders about the policy objectives of a potential government. Consequently, we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy. A discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995. The predicted values are then used as a proxy for market expectations in a model of speculative currency crises.

Suggested Citation

  • Leblang, David & Bernhard, William, 2000. "The Politics of Speculative Attacks in Industrial Democracies," International Organization, Cambridge University Press, vol. 54(2), pages 291-324, April.
  • Handle: RePEc:cup:intorg:v:54:y:2000:i:02:p:291-324_44
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    Cited by:

    1. Martínez, Juan & Santiso, Javier, 2003. "Financial Markets and Politics: The Confidence Game in Latin American Emerging Economies," MPRA Paper 12909, University Library of Munich, Germany.
    2. Puspa D. Amri & Thomas D. Willett, 2017. "Policy Inconsistencies and the Political Economy of Currency Crises," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 1-24, February.
    3. Christopher R. Way, 2005. "Political Insecurity and the Diffusion of Financial Market Regulation," The ANNALS of the American Academy of Political and Social Science, , vol. 598(1), pages 125-144, March.
    4. Thomas Sattler & Stefanie Walter, 2010. "Monetary Credibility Vs. Voter Approval: Political Institutions And Exchange‐Rate Stabilization During Crises," Economics and Politics, Wiley Blackwell, vol. 22(3), pages 392-418, November.
    5. Nathan M Jensen, 2005. "Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions," International Finance 0512002, University Library of Munich, Germany.
    6. David A. Steinberg & Karrie J. Koesel & Nicolas W. Thompson, 2015. "Political Regimes and Currency Crises," Economics and Politics, Wiley Blackwell, vol. 27(3), pages 337-361, November.
    7. Wray, Christopher R., 2004. "Fear Factor: How Political Insecurity Shapes the Diffusion of Financial Market Deregulation," Centre on Regulation and Competition (CRC) Working papers 30607, University of Manchester, Institute for Development Policy and Management (IDPM).

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