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Democracy and Markets: The Case of Exchange Rates

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Author Info
John R. Freeman () (University of Minnesota)
Jude C. Hays (University of Michigan)
Helmut Stix () (Oesterreichische Nationalbank)

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Abstract

The relationships between the workings of democratic institutions and currency markets are studied. Several competing propositions about how political (re)equilibration affects currency markets are derived and tested. The results support the view that democratic politics affects currency markets. Expectations and uncertainty about electoral outcomes and government survival affect the probability of switching between currency market equilibria. Additionally, opinion polls about chief executive performance have a direct effect on the probabilities of switches between currency regimes suggesting that these polls cause currency traders to revise their expectations about the stability of governments and (or) the contents of public policies. Electoral institutions mitigate the impact of politics on currency market equilibria. Political effects are weaker in countries with proportional representation electoral systems than in countries with majority-plurality systems. There is less evidence that central bank independence, consensual-corporatist systems, or "political coherency" reduces the effect of politics on currency markets.

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Publisher Info
Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 39.

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Length: 49 pages
Date of creation: 01 Dec 1999
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Publication status: Published in American Journal of Political Science, 44(3), July 2000
Handle: RePEc:onb:oenbwp:39

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Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nathan M Jensen, 2005. "Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions," International Finance 0512002, EconWPA. [Downloadable!]
  2. Marcel Fratzscher & Livio Stracca, 2009. "Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro," Working Paper Series 1064, European Central Bank. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. Nathan M Jensen, 2005. "International Institutions and Market Expectations: Stock Price Responses to the WTO Ruling on the 2002 U.S. Steel Tariffs," International Trade 0512008, EconWPA. [Downloadable!]
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