Sustaining Fixed Rates: The Political Economy of Currency Pegs in Latin America

Wellesley College Working Paper No. 2001-06

42 Pages Posted: 23 Sep 2001

See all articles by S. Brock Blomberg

S. Brock Blomberg

Ursinus College

Jeffry Frieden

Harvard University

Ernesto Stein

Inter-American Development Bank (IDB)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

Abstract

This paper studies Latin American exchange rate regimes since 1960. We model government exchange rate regime choice, constrained by politics. The model implies that the larger the tradable sectors exposed to international competition, the less likely is the maintenance of a fixed exchange rate regime. It also implies that the probability of the maintenance of a fixed exchange rate increases as an election approaches. We evaluate these implications with hazard models to analyze the duration dependence of Latin American exchange rate arrangements from 1960-1994. We find substantial empirical evidence to support the model. Results are robust to the inclusion of a variety of other economic and political variables, to different time and country samples, and to different definitions of regime arrangement. Controlling for economic factors, a one percentage point increase in the size of the manufacturing sector is associated with a reduction of six months in the longevity of a country's currency peg. An impending election increases the conditional likelihood of staying on a peg by about 8 percent, while the aftershock of an election conversely increases the conditional probability of going off a peg by 4 percent.

JEL Classification: F3

Suggested Citation

Blomberg, S. Brock and Frieden, Jeffry and Stein, Ernesto Hugo, Sustaining Fixed Rates: The Political Economy of Currency Pegs in Latin America (July 2001). Wellesley College Working Paper No. 2001-06, Available at SSRN: https://ssrn.com/abstract=283432 or http://dx.doi.org/10.2139/ssrn.283432

S. Brock Blomberg (Contact Author)

Ursinus College ( email )

Collegeville, PA 19426-2562
United States

Jeffry Frieden

Harvard University ( email )

1737 Cambridge Street
Cambridge, MA 02138
United States

Ernesto Hugo Stein

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States

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