publication . Article . 2008

Political Pressures and Exchange Rate Stability in Emerging Market Economies

Ester Faia; Massimo Giuliodori; Michele Ruta;
English
  • Published: 01 Jan 2008
  • Publisher: Univ Cema
  • Country: Italy
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 e...
Subjects
free text keywords: exporters and financial lobbies, exchange rate stability, exporters and financial lobbies, exchange rate stability, General Economics, Econometrics and Finance, Macroeconomics, Empirical evidence, Politics, Rational expectations, Interest rate parity, Economics, Foreign exchange market, Exchange rate, Monetary economics, Currency, International economics, Government, jel:F3, jel:D7
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publication . Article . 2008

Political Pressures and Exchange Rate Stability in Emerging Market Economies

Ester Faia; Massimo Giuliodori; Michele Ruta;