1Exchange Rates - Domestic Societal Approach• Who wants what?– Examine domestic distributional aspects of exchange rate policy (just as we did with trade).• Predict winners, losers, and coalition patterns. Draw on Economics to determine how exchange rates affect the incomes of various groups• This ties national policy choices to the interests of particular social groups• Then reintroduce Politics (i.e., constraints of collective action and structure of policymaking institutions).2Dimensions of Exchange Rate Policy• Two dimensions of exchange rate policy:1. STABILITY (fixed vs. floating regime). 2. LEVEL (strong vs. weak $US currency).• STABILITY: Winners and Losers – Policy issue: which exchange rate regime to adopt?– Many regimes possible (IMF lists 9 types).– Continuum runs from fixed to floating regimes.Fixed Independently FloatingManaged FloatingAdjustable according to a set of indicators3• For now, consider a dichotomous choice: Fix or Float? Fixing involves a trade-off - “Unholy Trinity” (Cohen). Fixing promotes int’l trade and investment but, with internationally mobile capital, renders domestic monetary policy impotent. • How are interest groups affected by trade-off (Frieden)?• “Winners” of fixing are actors with overseas economic ties:– International investors (MNCs)– Exporters of traded goods (autos, aircraft, high-tech, agriculture).– Internationally-oriented merchants and shippers (import-export businesses and shipping lines).• “Losers” are groups tied to the domestic economy.– Import-competing producers (textiles, apparel, sugar, etc.)– Nontradables producers (construction, prepared food, services).4LEVEL: Winners and Losers• Policy issue: what level to target for the exchange rate. A distinct coalition pattern for the level as opposed to stability.• Supporters of depreciation: – Export-competing producers of traded goods.– Import-competing producers of traded goods. (Note that the traded goods sector is united on level but divided on stability)• Supporters of appreciation:– Nontradables producers. Appreciation helps nontradables producers because it raises the price of their output relative to the price of the tradable goods they consume or have to buy as inputs.– International investors (MNCs)– Consumers (they do not lobby – See Mancur Olson).– Foreign producers (prevented by law from lobbying).5Figure 1: Exchange-Rate PoliticsPreferred Level of the ExchangeRate1. High 2. Low1. Low11Internationaltraders andinvestors12Export-competingtraded goodsproducersPreferreddegree ofexchangerateflexibility/nationalmonetaryindependence2. High21Non-tradablesproducers22Import-competingtraded goodsproducersSource: Jeffry A. Frieden, "Exchange Rate Politics: Contemporary Lessons from American History." Review of International Political Economy 1, 1 (Spring 1994):85.6Collective Action• Comparison with Trade: Unlike trade policy, the exchange rate is a high-cost collective action issue with few opportunities for excluding free-riders.• For both LEVEL and STABILITY lobbying is a public good for literally millions of individual firms. • Large group setting implies limited lobbying due to small per-capita stakes, negligible impact of individual contributions, costs of organizing everyone, bargaining over terms, enforcing agreements.• But privileged groups are possible – Caterpillar Tractors in the 1980s.•Nevertheless, exchange rate only rarely subject to interest group pressures (exceptions: 1890s, 1930s, 1980s).7Policymaking Institutions• Institutional barriers to interest group activity– Policymaking institutions very insulated from societal pressures (contrast with trade policy). – More true of the junior partner (Federal Reserve) than with Treasury (ESF). – Greater institutional insularity implies additional barriers to collective action on the part of social