A Political-Economic Model of the Choice of Exchange Rate Regime

IMF Working Papers, December 1, 2002

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A Political-Economic Model of the Choice of Exchange Rate Regime

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Bibliographic details

• Authors: Yan M Sun
• Published: December 1, 2002
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451874907.001

Summary

• Facing electoral uncertainty, a government chooses its exchange regime in a trade-off among three incentives:
  • (i) tying the hands of its opponent should it lose the election;
  • (ii) facilitating its own future policy implementation should it win the election; and
  • (iii) increasing its chance of reelection.
• This Working Paper describes research in progress and the views expressed do not necessarily represent those of the IMF or IMF policy.

Key findings and analytical focus

• The model centers on the incumbent government's regime choice under electoral uncertainty and emphasizes strategic interactions between incumbents and opponents with respect to exchange rate arrangements.
• Major thematic elements:
  • Conventional peg and exchange rate arrangements
  • Exchange rate flexibility and exchange rate regimes
  • Trade-offs involving credibility, policy implementation, and electoral incentives
  • Interaction with fiscal and monetary constraints (budget constraint referenced)
  • Links to inflation, prices, and foreign exchange considerations

Policy implications and incentives highlighted

• Governments may choose exchange rate regimes not solely on macroeconomic fundamentals but to:
  • Constrain successors (tie hands) if anticipating electoral defeat;
  • Preserve or enhance their own ability to implement policies if re-elected;
  • Signal competence or stability to increase reelection prospects.
• The regime choice is therefore influenced by political-economy considerations alongside conventional economic trade-offs.

Subjects and keywords

• Subject: Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Expenditure, Foreign exchange, Inflation, Prices
• Keywords: budget constraint, choice of a government, Conventional peg, exchange rate, Exchange rate arrangements, Exchange rate flexibility, exchange rate regimes, exchange regime, incumbent government, incumbent's regime policy, Inflation, political economy, regime choice, WP

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Content in this bundle

• A Politcal-Economic Model of the Choice of Exchange Rate Regime - WP/02/212
  • A Politcal-Economic Model of the Choice of Exchange Rate Regime - WP/02/212 (Markdown version)
  • A Politcal-Economic Model of the Choice of Exchange Rate Regime - WP/02/212 (PDF)