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Political Pressures and Exchange Rate Stability in Emerging Market Economies

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  • Ester Faia
  • Massimo Giuliodori
  • Michele Ruta

Abstract

This paper presents a political economy model of exchange rate policy. The theory is based on a common agency approach with rational expectations. Financial and exporter lobbies exert political pressures to influence the government's choice of exchange rate policy, before shocks to the economy are realized. The model shows that political pressures affect exchange rate policy and create an over-commitment to exchange rate stability. This helps to rationalize the empirical evidence on fear of large currency swings that characterizes exchange rate policy of many emerging market economies. Moreover, the model suggests that the effects of political pressures on the exchange rate are lower if the quality of institutions is higher. Empirical evidence for a large sample of emerging market economies is consistent with these findings.

Suggested Citation

  • Ester Faia & Massimo Giuliodori & Michele Ruta, 2008. "Political Pressures and Exchange Rate Stability in Emerging Market Economies," Journal of Applied Economics, Taylor & Francis Journals, vol. 11(1), pages 1-32, May.
    • Handle: RePEc:taf:recsxx:v:11:y:2008:i:1:p:1-32
    DOI: 10.1080/15140326.2008.12040497
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    Cited by:

    1. Wei Jiang & Yaqin Wang & Tao Wang, 2023. "The Political Economy of American Exchange Rate Bill Voting: From the Perspective of RMB Appreciation," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 13(1), pages 1-3.
    2. Mohamed Isse Ibrahim & Ahmed Ibrahim Nageye, 2017. "Determinants of Exchange Rates in Somalia," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 5(3), pages 233-244, September.
    3. Philipp Harms & Mathias Hoffmann, 2011. "Deciding to Peg the Exchange Rate in Developing Countries: The Role of Private-Sector Debt," Open Economies Review, Springer, vol. 22(5), pages 825-846, November.
    4. Guo, Wei & Chen, Zhongfei & Šević, Aleksandar, 2021. "The political pressure from the US upon RMB exchange rate," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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