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

Journal of Applied Economics, Vol. 8, No. 2, pp. 203-225, November 2005

Posted: 29 Dec 2005 Last revised: 9 Mar 2011

See all articles by S. Brock Blomberg

S. Brock Blomberg

Ursinus College

Jeffry Frieden

Harvard University

Ernesto Stein

Inter-American Development Bank (IDB)

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Abstract

Government exchange rate regime choice is constrained by both political and economic factors. One political factor is the role of special interests: the larger the tradable sectors exposed to international competition, the less likely is the maintenance of a fixed exchange rate regime. Another political factor is electoral: as an election approaches, the probability of the maintenance of a fixed exchange rate increases. We test these arguments with hazard models to analyze the duration dependence of Latin American exchange rate arrangements from 1960 to 1999. We find substantial empirical evidence for these propositions. 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.

Keywords: exchange rates, elections

JEL Classification: D72, F31

Suggested Citation

Blomberg, S. Brock and Frieden, Jeffry and Stein, Ernesto Hugo, Sustaining Fixed Rates: The Political Economy of Currency Pegs in Latin America. Journal of Applied Economics, Vol. 8, No. 2, pp. 203-225, November 2005, Available at SSRN: https://ssrn.com/abstract=862624

Universidad del CEMA (Contact Author)

Universidad del CEMA - Department of Economics ( email )

Buenos Aires
Argentina
5411 6314-3000 (Phone)
5411 4314-1654 (Fax)

HOME PAGE: http://www.cema.edu.ar/publicaciones/jae.html

S. Brock Blomberg

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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