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The political choice and collapse of fixed exchange rates

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  • Hefeker, Carsten

Abstract

Evidence suggests there is a strong tendency among states to choose fixed exchange rates. Yet he interpretation of fixed exchange rates as a monetary policy rule remains unconvincing. Adopting an endogenous policy perspective, this paper argues that political-support maximizing governments choose fixed exchange rates to benefit domestic interest groups. Exogenous shocks, however, may change domestic political equilibria, causing the collapse of international arrangements and the switch to flexible exchange rates. Institutional pecularities make monetary unification a special case in this cycle.

Suggested Citation

  • Hefeker, Carsten, 1995. "The political choice and collapse of fixed exchange rates," Discussion Papers, Series II 277, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:277
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    Cited by:

    1. Georg Erber & Harald Hagemann, 1996. "Sustainable Price Stability for Europe: Prospective Effects of a European Central Bank on Long-Term Growth and Employment ; Lessons from the Past: The EU Countries and the EMS," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 65(3), pages 381-391.
    2. H.P. Grãœner & C. Hefeker, 1995. "Domestic pressures and the exchange rate regime: why economically bad decisions are politically popular?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 48(194), pages 331-350.

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    More about this item

    Keywords

    exchange rate regime; monetary union; political economy;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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