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Minority Governments and Exchange Rate Regimes

Author

Listed:
  • Bumba Mukherjee

    (Princeton University, USA)

  • David Leblang

    (University of Colorado, USA)

Abstract

We examine the impact of minority governments on the choice of exchange rate regime in advanced OECD democracies after the collapse of the Bretton Woods system. We demonstrate that leaders of minority governments had a lower political discount factor in office than majority governments across advanced OECD democracies and use that finding to motivate a model. The model predicts that leaders of minority governments had strong incentives to switch from a fixed to a floating exchange rate because of a lower discount factor in office. Results from Markov transition models estimated on de facto exchange rates adopted by OECD and West European OECD countries between 1975 and 1999 provide robust statistical support for the model’s prediction. We also briefly discuss how the findings presented in this paper have important implications for understanding the likelihood of expansion of Economic and Monetary Union (EMU) to new democracies in Central and Eastern Europe in the near future.

Suggested Citation

  • Bumba Mukherjee & David Leblang, 2006. "Minority Governments and Exchange Rate Regimes," European Union Politics, , vol. 7(4), pages 450-476, December.
  • Handle: RePEc:sae:eeupol:v:7:y:2006:i:4:p:450-476
    DOI: 10.1177/1465116506069438
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    References listed on IDEAS

    as
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    3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    4. Frieden, Jeffry A., 2002. "Real Sources of European Currency Policy: Sectoral Interests and European Monetary Integration," International Organization, Cambridge University Press, vol. 56(4), pages 831-860, October.
    Full references (including those not matched with items on IDEAS)

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