Lawrence Broz 201The argument advanced in this chapter allows for the possibility of stable
international monetary regimes in conjunction with heterogeneous national policy
preferences. Participants of a regime can have different—even conflicting—national
preferences on exchange-rate policy if regime stability entails a specialization of
tasks among members of the system, whereby members of different preference
and power perform different regime-stabilizing functions. The analytical point of
departure is still [the] extension of public-goods theory to the international arena.
However, there is no theoretical reason requiring any one nation-state to provide
all of these functions. Instead a division of responsibility may arise due to
asymmetries of interest among states (which is a function of domestic politics)
regarding the importance of these goods, and due to asymmetries of power among
states (which is a function of the relative international positions of nation-states)
in the global system.
The place to begin is with comparative politics. Nations differ with respect to
their social, economic, and political characteristics; so we can expect that they
will attach different values to the fundamental trade-offs entailed in adhering to
alternative international monetary regimes. The primary efficiency advantage of
stable exchange rates is that international trade and investment can be conducted
with minimal risk of capital losses due to currency fluctuations. The well-known
trade-off is that stable (fixed) exchange rates require the subordination of domestic
monetary policy to currency and balance-of-payments considerations.... [A]ctors
deeply involved in international trade and payments (export-oriented producers
of tradable goods, international merchants, global investors) favor stability in
exchange rates, while actors whose economic activity is confined primarily to the
domestic economy (import-competing producers of tradable goods, producers of
non-tradables) favor the domestic-monetary flexibility that comes with variable
exchange rates. From this base it is a relatively small step to move to the comparative
level: the dissimilar composition of nations in terms of their “production profiles”
suggests the likelihood of uncommon national objectives with respect to the issue
of exchange-rate variability.
The fundamental point is that national governments pursue international monetary
policies for domestic political reasons having to do with the policy interests of
important social groups and coalitions. But the processes of policy formation cannot
be considered in a national vacuum. Exchange rates are, after all, relational. More
importantly, the actions of at least the major states in the system inevitably affect
the international monetary system, and thus their own domestic economies. As a
result, analysis must also consider how the policy choices of major states affect
the operation and stability of the international monetary system and, in so doing,
feed back upon the domestic processes of exchange rate policy making.
Domestic groups and coalitions lobby government because they know that policy
has direct effects on their welfare through its national impact. Domestic groups
and coalitions in major “price-maker” countries, however, are also aware that
government policy has indirect effects on their welfare by way of its impact on
the international monetary order. Awareness of this second-order international impact
suggests that groups and coalitions at least partially internalize the international
externalities of their governments’ actions. Full internalization does not occur