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Political Science
Lilach Gilady

Countries that are faced with balance-of-payment problems or high levels of foreign currency debt can choose to “adjust internally” by reducing price or “adjust externally” with “beggar-thy- neighbor” policies, through the devaluation of their currency. External adjustment places the consequences of currency devaluation on their trade partners. In order to understanding states choose to adjust either “internally” or “externally”, it is essential to examine the states domestic political and social characteristics and external “opportunities” or “constrains”. The game theory offers a basic foundation for understanding the rational calculations of a states policy choices and the international environment that will either foster or impend cooperation among nations. The logic of the Presoner’s Dilemma accordingly requires an accurate assumption about the “nature of the game”, which is dependent on correctly assessing the implications of rational actor; preference, interests and strategic choices based on domestic and external factors. The internal political structure and level of domestic stability, combined with external influences will determine weather or not a state will rationally choose to break or abide by the “golden standard” and norms of international economic relations. This is essential in understanding the international environment that may potentially foster a “currency war”. In order for cooperation to thrive there are two essential requirements, reciprocity and the future of trade and interaction among states must be important enough to discourage states from defecting or devaluing their currency. It is argued that unstable governments are more likely to defect because the time that they are in power is less and it is less likely for future interactions with other states…(less time horizon) the rational choice is thus look at short term gains and adjust “internally”… conditional free-tradestates will only cooperate if they expect the other states will do the same. If states expect other sates will defect and devalue their currecy they too will devalue their currency…in repeated interactions rational states will only cooperate if they expect the other to cooperat and they will defect if they expect the other to defect… The Internal political economy focuses on examining the external opportunities and constrains that will contribute to a states rational calculation of weather or not to devalue their currency (or defect). International institutions such as the IMF and World Bank will play a crucial role in facilitating cooperation and stable fixed exchange rate. The ability of these instantiations to convince these sates that the consequences of devaluation surpass its potential gains… “the comparative political economy” examines the domestic politics of a state that in turn det
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