With heterogeneous productivity and sticky prices in the short run, exchange rate changes can generate real effects on agents in the economy; the result is that the currency regime becomes a policy variable amenable to political competition. This paper discusses how special interests and government policymakers interact in the decisionmaking processes concerning the optimal level of the exchange rate, and how these interactions may lead to a disconnect between the exchange rate and economic fundamentals which---under appropriate conditions---may affect the timing, and possibility, of a currency crisis. The model is also tested empirically with exchange rate data from 25 countries.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
5516.
Find related papers by JEL classification: F34 - International Economics - - International Finance - - - International Lending and Debt Problems D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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