25716
Exchange Rate Politics
JEFFRY A.FRIEDEN
Government policies toward national currencies can be
controversial. Commitments to a fixed exchange rate, devaluation,
or real appreciation can all lead to political conflict. Jeffry Frieden
argues that currency policy is more likely to excite controversy in
those economies that are more open. He then provides an
interpretation of the domestic societal divisions over exchange
rates. Internationally oriented economic actors are more likely to
desire a fixed exchange rate than are domestically oriented ones.
By the same token, tradables producers are more likely to want a
weak (relatively depreciated) currency than are nontradables
producers. This leads to expectations about domestic societal
cleavages in debates over national currency policies.For 20 years currency values have been a growing concern of policy makers,
analysts, and investors. Exchange rates have also been a topic of increasing domestic
and international political debate, and it is widely recognized that they involve an
inseparable mix of politics and economics....
This essay has two related purposes. The first is to explain changes in the
political importance of exchange rates. Here my principal argument is that the
distributional impact of exchange rate movements increases as economies become
more open on capital and current account, and that the politicization of currency
policy is an inevitable result of higher levels of international trade and payments.
My second purpose is to explain the patterns of political division and debate
that arise over exchange rates. Here I project which groups in society will be
more and less favorable to fixed or floating exchange rates, and to relatively
appreciated or depreciated exchange rates. For illustrative purposes, I discuss
several historical and contemporary episodes: American exchange rate politics
in the late 19th and early 20th century, and current developments in European
monetary integration.
THE POLITICS OF EXCHANGE RATES: GENERAL PRINCIPLES
My first task is to explain the degree to which the exchange rate becomes a target
of important political conflict. The second is to explain the sorts of political divisions
that develop when exchange rates become a topic of political debate.