Special Interests, Regime Choice, and Currency Collapse

Jamus Lim

MPRA Paper from University Library of Munich, Germany

Abstract: With heterogeneous productivity and sticky prices in the short run, exchange rate changes can generate real effects on agents in the economy; the result is that the currency regime becomes a policy variable amenable to political competition. This paper discusses how special interests and government policymakers interact in the decisionmaking processes concerning the optimal level of the exchange rate, and how these interactions may lead to a disconnect between the exchange rate and economic fundamentals which---under appropriate conditions---may affect the timing, and possibility, of a currency crisis. The model is also tested empirically with exchange rate data from 25 countries.

Keywords: Currency crisis; exchange rate policy; special interest politics; new open-economy macroeconomics (search for similar items in EconPapers)
JEL-codes: D72 F34 F41 (search for similar items in EconPapers)
Date: 2006, Revised 2007
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:5516

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