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《国际政治经济学》文献资料（Political Economy of Money and Finance：Monetary System and Exchange Rate）Democratic Institutions and Exchange Rate

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Democratic Institutions and Exchange-rate Commitments William Bernhard and David Leblang From the end of World War II until 1971,exchange-rate practices were governed by the Bretton Woods system (or the dollar standard)-an international regime of fixed exchange rates with the U.S.dollar serving as the anchor currency.The system oper- ated smoothly through the 1950s,but strains appeared in the 1960s,reflecting a combination of the gold overhang and lax U.S.macroeconomic policies.In 1971 the Nixon administration slammed the gold window shut,effectively ending the Bretton Woods system.Since the early 1970s,countries have been able to choose a variety of exchange-rate regimes ranging from a freely floating exchange rate to one that is rigidly fixed to that of another country.We examine the exchange-rate arrangements adopted by the industrial democracies since 1974.We focus on domestic political institutions to explain a government's choice among three main exchange-rate op- tions:a floating exchange rate,a unilateral peg,and a multilateral exchange-rate regime(specifically,the Snake and the European Monetary System). The choice of exchange-rate arrangement,although often shrouded in highly tech- nical language,has relatively predictable consequences for an economy.A fixed (pegged)exchange rate helps to stabilize the external trading environment by decreas- ing uncertainty surrounding the exchange rate and by reducing transaction costs across countries.Additionally,a fixed rate can provide a nominal anchor to macroeconomic policy.On the other hand,adherence to a fixed exchange rate implies a loss of domes- tic monetary policy autonomy.!Without the ability to use monetary policy to counter localized economic shocks,countries may suffer unnecessary welfare losses in out- put or employment. Commitment to a fixed exchange rate also has implications for domestic political competition.A fixed exchange rate might stabilize the environment for trade or help achieve certain macroeconomic policy goals,but it limits politicians'discretion over monetary policy.Under a fixed exchange rate,politicians in the governing parties lose the ability to manipulate monetary policy for electoral or partisan reasons.The 1.Mundell 1961 International Organization 53,1,Winter 1999,pp.71-97 1999 by The IO Foundation and the Massachusetts Institute of Technology

Democratic Institutions and Exchange-rate Commitments William Bernhard and David Leblang From the end of World War I1 until 1971, exchange-rate practices were governed by the Bretton Woods system (or the dollar standard)-an international regime of fixed exchange rates with the U.S. dollar serving as the anchor currency. The system operated smoothly through the 1950s, but strains appeared in the 1960s, reflecting a combination of the gold overhang and lax U.S. macroeconomic policies. In 1971 the Nixon administration slammed the gold window shut, effectively ending the Bretton Woods system. Since the early 1970s, countries have been able to choose a variety of exchange-rate regimes ranging from a freely floating exchange rate to one that is rigidly fixed to that of another country. We examine the exchange-rate arrangements adopted by the industrial democracies since 1974. We focus on domestic political institutions to explain a government's choice among three main exchange-rate options: a floating exchange rate, a unilateral peg, and a multilateral exchange-rate regime (specifically, the Snake and the European Monetary System). The choice of exchange-rate arrangement, although often shrouded in highly technical language, has relatively predictable consequences for an economy. A fixed (pegged) exchange rate helps to stabilize the external trading environment by decreasing uncertainty surrounding the exchange rate and by reducing transaction costs across countries. Additionally, a fixed rate can provide a nominal anchor to macroeconomic policy. On the other hand, adherence to a fixed exchange rate implies a loss of domestic monetary policy autonomy.' Without the ability to use monetary policy to counter localized economic shocks, countries may suffer unnecessary welfare losses in output or employment. Commitment to a fixed exchange rate also has implications for domestic political competition. A fixed exchange rate might stabilize the environment for trade or help achieve certain macroeconomic policy goals, but it limits politicians' discretion over monetary policy. Under a fixed exchange rate, politicians in the governing parties lose the ability to manipulate monetary policy for electoral or partisan reasons. The 1. Mundell 1961 International Organization 53, 1, Winter 1999, pp. 71-97 o 1999 by The I0 Foundation and the Massachusetts Institute of Technology

72 International Organization loss of policy discretion potentially harms their ability to maintain their position in office.A floating exchange rate,on the other hand,gives politicians the flexibility to use external adjustment not only to counter local shocks but also to employ macro- economic policy for electoral or partisan advantage.This political dilemma raises an interesting question:Under what conditions will politicians commit to a fixed exchange-rate regime? We argue that politicians'incentives over the exchange-rate regime reflect the configuration of domestic political institutions,particularly electoral and legislative institutions.In systems where the cost of electoral defeat is high and electoral timing is exogenous,politicians will be less willing to forgo their discretion over monetary policy with a fixed exchange rate.In systems where the costs of electoral defeat are low and electoral timing is endogenous,politicians are more likely to adopt a fixed exchange-rate regime.Consequently,differences in domestic political systems can help account for variations in the choice of exchange-rate arrangements. In the first section we review the conventional literature about exchange-rate ar- rangements.In the second section we develop our argument concerning the relation- ship between domestic political institutions and exchange-rate regime choice.In the third section we draw on the optimal exchange-rate and international political economy literatures to identify control variables,including systemic influences,domestic eco- nomic conditions,and other political factors.In the fourth section we evaluate the importance of domestic political institutions on a sample of twenty countries using a constrained multinomial logit model.We present our conclusions in the final section. Choosing an Exchange-rate Arrangement Two broad literatures address the choice of exchange-rate arrangement.First,the optimal exchange-rate literature considers the type of exchange-rate commitment that is "best"given the characteristics of a nation's economy.2 This literature focuses on country characteristics such as economic openness,country size,and labor mobil- ity.More recent contributions argue that the optimal exchange arrangement depends not only on the structure of the economy but also on the sensitivity of the economy to domestic and international macroeconomic shocks.3 One major problem with this literature is that it does not specify the origin of politicians'policy preferences.In fact the conclusions and policy prescriptions reached 2.For example,Bosco 1987:Dreyer 1978:Heller 1978:Holden.Holden,and Suss 1979;Savvides 1990;and Wickham 1985.A related literature concerns optimal currency areas.This literature considers whether regions should participate in a currency union based on factors such as common vulnerability to shocks.It is optimal for countries experiencing similar shocks to join a currency union,whereas the existence of dissimilar shocks makes a floating exchange arrangement the more prudent choice.The seminal contributions of Mundell and McKinnon focus,respectively,on the importance of external bal- ance and price stability.See Mundell 1961;and McKinnon 1963.More recent variants of this literature examine the source of the shocks (for example,Tavlas 1993;Frankel and Rose 1996;and Eichengreen 1992a)and the question of whether the EC constitutes an optimal currency area. 3.See Fischer 1977:and Savvides 1990

72 International Organization loss of policy discretion potentially harms their ability to maintain their position in office. A floating exchange rate, on the other hand, gives politicians the flexibility to use external adjustment not only to counter local shocks but also to employ macroeconomic policy for electoral or partisan advantage. This political dilemma raises an interesting question: Under what conditions will politicians commit to a fixed exchange-rate regime? We argue that politicians' incentives over the exchange-rate regime reflect the configuration of domestic political institutions, particularly electoral and legislative institutions. In systems where the cost of electoral defeat is high and electoral timing is exogenous, politicians will be less willing to forgo their discretion over monetary policy with a fixed exchange rate. In systems where the costs of electoral defeat are low and electoral timing is endogenous, politicians are more likely to adopt a fixed exchange-rate regime. Consequently, differences in domestic political systems can help account for variations in the choice of exchange-rate arrangements. In the first section we review the conventional literature about exchange-rate arrangements. In the second section we develop our argument concerning the relationship between domestic political institutions and exchange-rate regime choice. In the third section we draw on the optimal exchange-rate and international political economy literatures to identify control variables, including systemic influences, domestic economic conditions, and other political factors. In the fourth section we evaluate the importance of domestic political institutions on a sample of twenty countries using a constrained multinomial logit model. We present our conclusions in the final section. Choosing an Exchange-rate Arrangement Two broad literatures address the choice of exchange-rate arrangement. First, the optimal exchange-rate literature considers the type of exchange-rate commitment that is "best" given the characteristics of a nation's e~onomy.~ This literature focuses on country characteristics such as economic openness, country size, and labor mobility. More recent contributions argue that the optimal exchange arrangement depends not only on the structure of the economy but also on the sensitivity of the economy to domestic and international macroeconomic shock^.^ One major problem with this literature is that it does not specify the origin of politicians' policy preferences. In fact the conclusions and policy prescriptions reached 2. For example, Bosco 1987; Dreyer 1978; Heller 1978; Holden, Holden, and Suss 1979; Savvides 1990; and Wickham 1985. A related literature concerns optimal currency areas. This literature considers whether regions should participate in a currency union based on factors such as common vulnerability to shocks. It is optimal for countries experiencing similar shocks to join a currency union, whereas the existence of dissimilar shocks makes a floating exchange arrangement the more prudent choice. The seminal contributions of Mundell and McKinnon focus, respectively, on the importance of external balance and price stability. See Mundell 1961; and McKinnon 1963. More recent variants of this literature examine the source of the shocks (for example, Tavlas 1993; Frankel and Rose 1996; and Eichengreen 1992a) and the question of whether the EC constitutes an optimal currency area. 3. See Fischer 1977: and Savvides 1990

Democratic Institutions and Exchange Rates 73 in this literature vary according to initial assumptions regarding whether the policy- maker's objective function emphasizes price stability or aggregate output.4 We argue that the configuration of domestic political institutions will influence politicians' need to maintain policy flexibility,which,in turn,shapes their preferences over the exchange-rate arrangement. Second,the international political economy literature examines the question of exchange-rate regime choice.The literature has traditionally focused on the presence (or absence)of an international hegemon to explain developments in the interna- tional monetary system.According to this view,a major power is necessary to pro- vide credible backing to the world's currency and act as a lender of last resort.5 Subsequent work examines the classical gold standard,the interwar period,and the Bretton Woods regime.6 Since the breakup of Bretton Woods,however,states have been able to choose from a variety of exchange-rate arrangements.Under this permis- sive international monetary system,an emphasis on hegemonic power cannot ex- plain the specific variation of exchange-rate arrangements across states. More recent literature examines both systemic and domestic determinants of the international monetary behavior of a state.7 Substantively,much of this literature focuses on the development of alternative exchange-rate arrangements in Europe, including the Snake,the European Monetary System (EMS),and the planned transi- tion to a single currency.8 These accounts of European monetary cooperation empha- size the policy goals of insulating European economies from the fluctuations of the U.S.dollar,enhancing intra-EC trade,and controlling inflation by "importing"Ger- many's anti-inflation credibility. Political economists have also developed a variety of domestic-level explanations for macroeconomic policy and exchange-rate choice.One set of explanations fo- cuses on the demanders of exchange-rate policies,including economic sectors or specific interest groups.10 The policy demands of these actors are assumed to reflect their position in the global economy.11 These explanations,however,tend to under- play the role of politicians in the choice of exchange-rate arrangement.Although politicians are responsive to societal interests,they often have incentives and policy preferences independent of societal actors. Political economists have also investigated the relationship between domestic po- litical institutions and exchange-rate decisions.Three types of arguments-based on welfare gains,policymaking capabilities,and credible commitments-potentially link 4.See Aghevli,Khan,and Montiel 1991;and Melvin 1985. 5.Kindleberger 1973. 6.On the gold standard,see Eichengreen 1989;and Gallarotti 1993.On the interwar period,see Eichengreen 1992b;and Simmons 1994.On the Bretton Woods regime,see Eichengreen 1996;Gowa 1983;and Keohane 1984. 7.Cohen 1996. 8.For example,Eichengreen 1992a;Eichengreen and Frieden 1994;Loriaux 1991;Ludlow 1982; McNamara 1995;Oatley 1994;and Sandholtz 1993. 9.See Frieden 1991 and 1994;and Simmons 1994. 10.See Frieden 1991;and Gowa 1983. 11.See Frieden 1991;and Keohane and Milner 1996

Democratic Institutions and Exchange Rates 73 in this literature vary according to initial assumptions regarding whether the policymaker's objective function emphasizes price stability or aggregate o~tput.~ We argue that the configuration of domestic political institutions will influence politicians' need to maintain policy flexibility, which, in turn, shapes their preferences over the exchange-rate arrangement. Second, the international political economy literature examines the question of exchange-rate regime choice. The literature has traditionally focused on the presence (or absence) of an international hegemon to explain developments in the international monetary system. According to this view, a major power is necessary to provide credible backing to the world's currency and act as a lender of last re~ort.~ Subsequent work examines th,e classical gold standard, the interwar period, and the Bretton Woods regime.6 Since the breakup of Bretton Woods, however, states have been able to choose from a variety of exchange-rate arrangements. Under this permissive international monetary system, an emphasis on hegemonic power cannot explain the specific variation of exchange-rate arrangements across states. More recent literature examines both systemic and domestic determinants of the international monetary behavior of a state.' Substantively, much of this literature focuses on the development of alternative exchange-rate arrangements in Europe, including the Snake, the European Monetary System (EMS), and the planned transition to a single ~urrency.~ These accounts of European monetary cooperation emphasize the policy goals of insulating European economies from the fluctuations of the U.S. dollar, enhancing intra-EC trade, and controlling inflation by "importing" Germany's anti-inflation credibility. Political economists have also developed a variety of domestic-level explanations for macroeconomic policy and exchange-rate ch~ice.~ One set of explanations focuses on the demanders of exchange-rate policies, including economic sectors or specific interest groups.1° The policy demands of these actors are assumed to reflect their position in the global economy.ll These explanations, however, tend to underplay the role of politicians in the choice of exchange-rate arrangement. Although politicians are responsive to societal interests, they often have incentives and policy preferences independent of societal actors. Political economists have also investigated the relationship between domestic political institutions and exchange-rate decisions. Three types of arguments-based on welfare gains, policymaking capabilities, and credible commitments-potentially link 4. See Aghevli, Khan, and Montiel 1991; and Melvin 1985. 5. Kindleberger 1973. 6. On the gold standard, see Eichengreen 1989; and Gallarotti 1993. On the interwar period, see Eichengreen 1992b; and Simmons 1994. On the Bretton Woods regime, see Eichengreen 1996; Gowa 1983; and Keohane 1984. 7. Cohen 1996. 8. For example, Eichengreen 1992a; Eichengreen and Frieden 1994; Loriaux 1991; Ludlow 1982; McNamara 1995; Oatley 1994; and Sandholtz 1993. 9. See Frieden 1991 and 1994; and Simmons 1994. 10. See Frieden 1991; and Gowa 1983. 11. See Frieden 1991; and Keohane and Milner 1996

74 International Organization the electoral system to exchange-rate commitments.This link,however,is less clear, reflecting a lack of theoretical consensus among scholars First,recent literature argues that exchange-rate commitments can help stabilize the macroeconomy,providing an external source of policy discipline.12 A fixed ex- change rate,therefore,would provide greater social welfare gains where politicians are unable to pursue responsible monetary and fiscal policies.This argument implies that countries with weak and unstable governments will be more likely to adopt fixed exchange rates,since these governments are often unable to agree on stabilization programs.Given that proportional representation systems produce weaker,less du- rable governments more often than majoritarian systems,this argument suggests that countries with proportional representation electoral systems will be more likely to adopt fixed exchange rates than those with majoritarian systems. A second set of arguments focuses on the policymaking capabilities of the govern- ment to explain exchange-rate commitments.Weak or unstable governments lack the ability to implement the difficult domestic adjustments often necessary to sustain a fixed exchange rate.13 Strong,durable governments are able to pursue the policies required to maintain the fixed exchange rate.In contrast to the argument based on welfare gains,this argument implies that countries with majoritarian electoral sys- tems will be more likely to fix the exchange rate than countries with a proportional representation system.Majoritarian electoral systems usually produce single-party majority governments capable of decisive policy action.Proportional representation systems,on the other hand,typically produce coalition governments.These govern- ments may have difficulty shifting domestic policies to maintain the fixed exchange rate due to the bargaining and negotiation that must occur between the coalition parties.14 Consequently,they will be less able to sustain an exchange-rate commit- ment. Third,some political economists argue that exchange-rate commitments can serve to constrain the policy options of future governments.The "tying the hands"'argu- ment suggests that a government will fix the exchange rate if subsequent govern- ments are likely to possess different policy priorities.In systems where policy change is incremental across governments,politicians have fewer incentives to make an institutional commitment,since they can trust subsequent governments to pursue similar policies.Sharp policy breaks between governments are more likely in majori- tarian systems than in proportional representation systems.15 Consequently,the "ty- ing the hands"argument implies that politicians in majoritarian systems will be more likely to fix the exchange rate than politicians in proportional representation systems. Given the variety of predictions,it is unsurprising that the empirical work on the relationship between electoral institutions and exchange-rate commitments has also been inconclusive.Eichengreen,for instance,examines the influence of electoral 12.See Flood and Isard 1989;Giavazzi and Pagano 1988;and Rogoff 1985. 13.See Eichengreen 1992b;and Simmons 1994. 14.Roubini and Sachs 1989. 15.Rogowski 1987

74 International Organization the electoral system to exchange-rate commitments. This link, however, is less clear, reflecting a lack of theoretical consensus among scholars. First, recent literature argues that exchange-rate commitments can help stabilize the macroeconomy, providing an external source of policy discipline.12 A fixed exchange rate, therefore, would provide greater social welfare gains where politicians are unable to pursue responsible monetary and fiscal policies. This argument implies that countries with weak and unstable governments will be more likely to adopt fixed exchange rates, since these governments are often unable to agree on stabilization programs. Given that proportional representation systems produce weaker, less durable governments more often than majoritarian systems, this argument suggests that countries with proportional representation electoral systems will be more likely to adopt fixed exchange rates than those with majoritarian systems. A second set of arguments focuses on the policymaking capabilities of the government to explain exchange-rate commitments. Weak or unstable governments lack the ability to implement the difficult domestic adjustments often necessary to sustain a fixed exchange rate.13 Strong, durable governments are able to pursue the policies required to maintain the fixed exchange rate. In contrast to the argument based on welfare gains, this argument implies that countries with majoritarian electoral systems will be more likely to fix the exchange rate than countries with a proportional representation system. Majoritarian electoral systems usually produce single-party majority governments capable of decisive policy action. Proportional representation systems, on the other hand, typically produce coalition governments. These governments may have difficulty shifting domestic policies to maintain the fixed exchange rate due to the bargaining and negotiation that must occur between the coalition parties.14 Consequently, they will be less able to sustain an exchange-rate commitment. Third, some political economists argue that exchange-rate commitments can serve to constrain the policy options of future governments. The "tying the hands" argument suggests that a government will fix the exchange rate if subsequent governments are likely to possess different policy priorities. In systems where policy change is incremental across governments, politicians have fewer incentives to make an institutional commitment, since they can trust subsequent governments to pursue similar policies. Shasp policy breaks between governments are more likely in majoritarian systems than in proportional representation systems.15 Consequently, the "tying the hands" argument implies that politicians in majoritarian systems will be more likely to fix the exchange rate than politicians in proportional representation systems. Given the variety of predictions, it is unsusprising that the empirical work on the relationship between electoral institutions and exchange-rate commitments has also been inconclusive. Eichengreen, for instance, examines the influence of electoral 12. See Flood and Isard 1989; Giavazzi and Pagano 1988; and Rogoff 1985 13. See Eichengreen 1992b; and Simmons 1994. 14. Roubini and Sachs 1989. 15. Rogowski 1987

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