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Inflation concerns and mass preferences over exchange‐rate policy

Michaël Aklin, Eric Arias and Julia Gray

Economics and Politics, 2022, vol. 34, issue 1, 5-40

Abstract: Exchange‐rate policies are cornerstones of the world economy. They also have fundamental welfare and distributional consequences on nations, firms, and individuals. How do individuals internalize these consequences? We challenge the conventional wisdom on the source of mass preferences and argue that many individuals understand currency policies through the lens of inflation. Specifically, we argue that people who are concerned about inflation are more likely to support a fixed exchange rate regime and are more likely to oppose depreciation. We present observational and experimental evidence across middle‐income (Argentina and Serbia) and developed (United Kingdom) countries to support our argument. Further tests suggest that fears over purchasing power—instead of debt or savings considerations—drive inflation concerns.

Date: 2022
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