Special Interests, Regime Choice, and Currency Collapse

Lim, Jamus Jerome (2006): Special Interests, Regime Choice, and Currency Collapse.

Abstract

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.

• Item Type: MPRA Paper
• Institution: The World Bank
• Language: English
• Keywords: Currency crisis; exchange rate policy; special interest politics; new open-economy macroeconomics
• Subjects: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics