POLI 354 Lecture : The political Economy of Exchange Rates Bonz & Frieden

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The international political economy of exchange rate policy. Interaction requires: coordination- interaction among government s to converge on a focal point. Intergovernmental cooperation crucial to the durability of fixed rate monetary systems: where political and other factors have encouraged cooperative behaviour to safeguard the common commitment to fixed exchange rates, the systems have endured, ex. Economic and monetary union and dollarization in latin america. Appreciation- increases the purchasing power of local residents by lowering the relative price of foreign goods. Lost competitiveness of local producers depreciation- reducing purchasing power by improving competitiveness by lowering price of domestically produced goods. Industries have different sensibility to changing exchange rate. Such activities faces substantial collective action problems voters care about their purchasing power and inflation, so politicians are concerned with the electoral consequences of exchange rate tend to maintain appreciated currencies before election delaying depreciation to after election.

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