The Reversal of Political Parties' Support for Overvalued Exchange Rates
44 Pages Posted: 19 Jul 2010 Last revised: 4 Sep 2010
Date Written: 2010
This paper shows that political parties strongly influence exchange rate policy, and that economic globalization has reversed which parties maintain overvalued exchange rates and which maintain undervalued exchange rates. When countries are insulated from the international economy, overvalued exchange rates benefit workers over capitalists, and left-wing parties adopt more overvalued exchange rates than right-wing parties. In globalized economies, right parties are more likely than left parties to overvalue the exchange rate because doing so redistributes income from labor to capital. These arguments are supported by analyses of time-series - cross-sectional data covering 110 countries over 31 years. The main finding is that left parties increase overvaluation at low levels of globalization and they decrease overvaluation at high levels of globalization. Additional analyses reveal that overvalued exchange rates increase income inequality and - two outcomes of import to class-based political parties - in globalized economies. The results suggest not only that parties have larger impacts on exchange rate policy than many theories would predict, but also that globalization can have transformative effects on the relationship between partisanship and economic policy.
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