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Currency Politics

Currency Politics: The Political Economy of Exchange Rate Policy

Jeffry A. Frieden
Copyright Date: 2015
Pages: 320
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  • Book Info
    Currency Politics
    Book Description:

    The exchange rate is the most important price in any economy, since it affects all other prices. Exchange rates are set, either directly or indirectly, by government policy. Exchange rates are also central to the global economy, for they profoundly influence all international economic activity. Despite the critical role of exchange rate policy, there are few definitive explanations of why governments choose the currency policies they do. Filled with in-depth cases and examples,Currency Politicspresents a comprehensive analysis of the politics surrounding exchange rates.

    Identifying the motivations for currency policy preferences on the part of industries seeking to influence politicians, Jeffry Frieden shows how each industry's characteristics-including its exposure to currency risk and the price effects of exchange rate movements-determine those preferences. Frieden evaluates the accuracy of his theoretical arguments in a variety of historical and geographical settings: he looks at the politics of the gold standard, particularly in the United States, and he examines the political economy of European monetary integration. He also analyzes the politics of Latin American currency policy over the past forty years, and focuses on the daunting currency crises that have frequently debilitated Latin American nations, including Mexico, Argentina, and Brazil.

    With an ambitious mix of narrative and statistical investigation,Currency Politicsclarifies the political and economic determinants of exchange rate policies.

    eISBN: 978-1-4008-6534-5
    Subjects: Business, Economics

Table of Contents

  1. Introduction The Political Economy of Currency Choice
    (pp. 1-18)

    The exchange rate is the most important price in any economy, for it affects all other prices. The exchange rate is itself set or strongly influenced by government policy. Currency policy therefore may be a government’s single most significant economic policy. This is especially the case in an open economy, in which the relationship between the national and international economies is crucial to virtually all other economic conditions.

    Policymakers who have to answer, directly or indirectly, to constituents, such as voters, interest groups, and investors, are the ones who make currency policy. Like all policies, the choices available to currency...

  2. CHAPTER 1 A Theory of Currency Policy Preferences
    (pp. 19-48)

    This study emphasizes the distributionally motivated currency policy preferences of economic actors—firms, industries, and groups. It argues that characteristics of an industry, including its exposure to exchange rate risk and the relative price effects of exchange rate movements, determine its exchange rate policy preferences. Because in an open economy the exchange rate affects all national economic actors, understanding the making of currency policy requires a more or less complete map of the national political economy.

    There are two relevant dimensions of exchange rate policy choice: the regime (fixed or floating) and the level (appreciated or depreciated). With regard to...

  3. CHAPTER 2 The United States: From Greenbacks to Gold, 1862–79
    (pp. 49-103)

    For much of the late nineteenth and early twentieth centuries, the United States was a hotbed of exchange rate controversy. A succession of US movements for international monetary alternatives—paper currency (greenbacks), a silver standard, bimetallism, and a variety of related schemes—were the global focal point of opposition to the gold standard. US currency activists sponsored a series of international monetary conferences that attempted to create a counterpoint to the international gold standard. Several presidential elections revolved around gold, and two significant third parties were formed to oppose it. The victory of the progold candidate in 1896 was a...

  4. CHAPTER 3 The United States: Silver Threats among the Gold, 1880–96
    (pp. 104-136)

    The United States was on the gold standard from 1879 until 1933, with a brief interruption during World War I. For almost all that time, US currency policy was politically controversial. The controversy became particularly heated during periods of economic distress, especially in the 1890s. In what is perhaps the most famous modern political conflict over exchange rate policy, the Populist movement launched a concerted attack on the gold standard, which led up to a presidential election fought largely over gold.

    The 1890s’ “battle of the standards” in the United States came at a crucial time in both global and...

  5. CHAPTER 4 European Monetary Integration: From Bretton Woods to the Euro and Beyond
    (pp. 137-185)

    A hundred years after the United States was divided by political conflict over the global monetary order, the European Union was consumed by debates over the creation of a regional monetary regime. The US debates resulted in the triumph of the gold standard, and the European ones culminated in the EMU with the adoption of a single currency, the euro, managed by the common European Central Bank.

    Just as the US struggle over gold implicated the broader nature of the US economy and its relation to the world economy, the European struggle over monetary integration implicated the very nature and...

  6. CHAPTER 5 Latin American Currency Policy, 1970–2010
    (pp. 186-219)

    The countries of Latin America have experienced virtually every sort of currency policy known to humanity. Indeed, some individual Latin American nations have themselves gone through many different regimes. The region has been a hotbed of macroeconomic instability since its independence from Spain and Portugal in the 1820s, when it was responsible for the first large flurry of developing country debt and, soon after, the first wave of developing country defaults. Latin America’s varied experiences with the gold standard and its alternatives were widely followed in the late nineteenth and early twentieth centuries. Over the past thirty years, Latin America...

  7. CHAPTER 6 The Political Economy of Latin American Currency Crises
    (pp. 220-245)

    On December 18, 2001, stores in several Argentine cities were looted by citizens furious about government economic policies, including the freezing of bank deposits. The austerity measures were particularly painful after a third straight year of economic stagnation. The next day, the looting spread much more widely throughout the country, and President Fernando de la Rúa declared a state of siege. That evening, de la Rúa—a Radical Party politician elected by coalition with the center-left Frepaso—called on the Peronists who dominated the legislature for unity to face the economic crisis. The Peronists quickly rejected the call. The popular...

  8. CHAPTER 7 The Politics of Exchange Rates: Implications and Extensions
    (pp. 246-263)

    The previous chapters provide an empirical evaluation of the theoretical propositions put forth in chapter 1 about the expected policy preferences of economic groups in society. These investigations, however, also suggest a series of related observations—some of which harken back to points made in chapter 1—that are worth making explicit. These include the relationship between currency politics and the level of economic integration, trade policy, international cooperation, and economic development. After exploring some of the implications of my main results, in this chapter I address these broader questions.

    As noted early on, the exchange rate is the most...

  9. Conclusions
    (pp. 264-266)

    Exchange rate policy is crucial to the international economy. Economic analysts recognize this, and recognize that currency policy is highly political, but their analyses typically focus on purely economic considerations, judging macroeconomic policy from the standpoint of a “representative agent.” However, politics is not made by representative agents but rather by representatives of powerful groups in society, of voters, or of political parties. A full understanding of currency policy must take these powerful political pressures into account—and even purely economic analyses would benefit from a recognition of their significance.

    This book makes a simple theoretical argument about the distributional...