v14_2003k - Journal of Public and International Affairs ,...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Journal of Public and International Affairs , Volume 14/Spring 2003 Copyright 2003, the Trustees of Princeton University http://www.princeton.edu/~jpia 10 U NDERSTANDING EXCHANGE RATE POLICY ANNOUNCEMENTS : A POLITICAL ECONOMY APPROACH Alexander F. Wagner Alexander F. Wagner is a Ph.D. candidate, Political Economy and Government, at the John F. Kennedy School of Government, Harvard University (awagner@fas.harvard.edu). The stability of the international financial system depends on the consistency of announcements, beliefs, and actions by countries and international organizations like the IMF. This article considers the first element in this trinity and analyzes the incentives of a rational policy maker to announce a fixed or flexible exchange rate regime. In a cross-sectional analysis for the 1990s, I find that countries with a non-functioning legal system, a low degree of the rule of law, high expropriation risk, low infrastructure quality and similar characteristics are more likely to announce fixed exchange rates. This result is consistent with a theoretical argument about announcing a fixed regime as a signal of goodness to the international community. 2 I. I NTRODUCTION 1 Understanding what drives policy announcements by governments is an important problem in the study and practice of international relations. An area where this is particularly relevant is international finance. The stability of the international economic system requires a sufficient degree of consistency between announcements, beliefs, and actions by the parties involved. When such consistency does not exist, the fragility of international financial relations becomes apparent. We have witnessed several spectacular examples of instability recently, and institutions like the IMF have come under considerable fire for not preventing financial turmoil in Asia, Russia, Latin America, and Europe. Few observers have recognized, however, that even the first piece of the puzzle, exchange rate policy announcements by countries, is not well understood. This motivates the central question of this article: Why do some countries announce to peg while others announce to float? It seems clear that such decisions are not only driven by economic criteria, such as optimum currency union considerations, but rather, are also driven by political and strategic factors. This article is primarily empirical in its approach. I present evidence that countries whose informal economic institutions, 2 such as bureaucratic performance, rule of law, and security of property rights, are of low quality, tend to announce a fixed exchange rate policy with a higher probability than countries with high-quality institutions. However, the empirical findings are also consistent with the core theoretical hypothesis of this article, namely that the announcement of a fixed exchange rate is a signal by which policy makers attempt to show that they are abiding by the rules of the international 3 community. community....
View Full Document

Page1 / 29

v14_2003k - Journal of Public and International Affairs ,...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online