Do policymakers under financial and political distress make undesirable policy choices? This paper attempts to answer this question by studying the relationship between democratization and currency devaluation under speculative pressures. The central argument is that young democracies exhibit relatively high probabilities of succumbing to speculative attacks, as the political cost of economic adjustment needed for defense is relatively high for these nascent regimes. The paper further contends that this relationship is stronger when the regime can mobilize fewer resources to defend their currencies. To test these arguments, this paper uses monthly data for 117 countries from 1975 to 2008. The results from statistical analysis provide corroborative evidence for these arguments.
BasMuhammet alSignorinoCurtis SWalkerRobert W (2007) Statistical backward induction: A simple method for estimating recursive strategic models. Political Analysis16(1): 21–40.
5.
BearceDavid H (2003) Societal preferences, partisan agents, and monetary policy outcomes. International Organization57(2): 373–410.
6.
BeckThorstenClarkeGeorgeGroffAlbertoKeeferPhilipWalshPatrick (2001) new tools in comparative political economy: The database of political institutions. World Bank Economic Review15(1): 165–176.
7.
BenderAdiDrazenAllan (2005) Political budget cycles in new versus established democracies. Journal of Monetary Economics52: 1271–1295.
8.
BernhardMichaelReenockChristopherNordstromTimothy (2003) Economic performance and survival in new democracies: Is there a honeymoon effect?Comparative Political Studies36: 404–431.
9.
BoixCarles (2003) Democracy and Redistribution. New York: Cambridge University Press.
10.
BrozJ Lawrence (2002) Political system transparency and monetary commitment regimes. International Organization56: 861–87.
11.
BrozJ LawrenceFriedenJeffry A (2001) The political economy of international monetary relations. Annual Review of Political Science4: 317–343.
12.
Bueno de MesquitaBruceSmithAlastairSiversonRandolph M.MorrowJames (2003) The Logic of Political Survival. New York: Cambridge University Press.
13.
CameronDavid R (1988) distributional coalitions and other sources of economic stagnation: On Olson’s rise and decline of nations. International Organization42: 561–603.
14.
CheibubJose AntonioGandhiJenniferVreelandJames Raymond (2009) Democracy and dictatorship revisited. Public Choice140(1): 1–35.
15.
EichengreenBarryRoseAndrew (2003) Does It Pay to Defend Speculative Attacks? In DooleyMichael P.FrankelJeffrey (eds) Managing Currency Crises in Emerging Markets. Chicago, IL: University of Chicago Press, 61–85.
FrankelJefferyRoseAndrew (1996) Currency crises in emerging markets: An empirical treatment. Journal of International Economics41: 351–366.
19.
FriedenJeffryGhezziPieroSteinErnesto (2001) Politics and Exchange Rates: A Cross-Country Approach to Latin America. In FriedenJeffrySteinErnesto (eds) The Currency Game: Exchange Rate Politics in Latin America. Baltimore, MD: Johns Hopkins University Press, 21–63.
20.
GasiorowskiMark JPoptaniZaheer (2006) The macroeconomic consequences of democratic transition. Studies in Comparative International Development41: 33–61.
21.
GerringJohnThackerStrom CMorenoCarola (2005) Centripetal democratic governance: A theory and global inquiry. American Political Science Review99: 567–581.
22.
GourevitchPeter A (1986) Politics in Hard Times: Comparative Responses to International Economic Crises. Ithaca, NY: Cornell University Press.
23.
GuisingerAlexandraSingerDavid Andrew (2010) Exchange rate proclamation and inflation-fighting credibility. International Organization64: 313–37.
24.
HaggardStephenKaufmanRobert (1995) The Political Economy of Democratic Transitions. Princeton, NJ: Princeton University Press.
25.
HalacMarinaSchmuklerSergio L (2004) Distributional effects of crises the financial channel. Economia5(1): 1–67.
26.
HeckmanJames J (1979) Sample selection bias as a specification error. Econometrica47(1): 153–161.
27.
HeniszWitold J (2000) The institutional environment for economic growth. Economics and Politics12(1): 1–31.
28.
HerrendorfBerthold (1999) Transparency, reputation, and credibility under floating and pegged exchange rates. Journal of International Economics49(1): 31–50.
29.
HollyerJames RRosendorffB PeterVreelandJames R (2014) Measuring transparency. Political Analysis22(3): 413–434.
30.
HuntingtonSamuel (1968) Political Orders in Changing Societies. New York: Yale University Press.
31.
KapsteinEthan BConverseNathan (2008) The Fate of Young Democracies. New York: Cambridge University Press.
32.
KatzensteinPeter J (1985) Small States in World Markets: Industrial Policy in Europe. Ithaca, NY: Cornell University Press.
33.
KeeferPhilip (2007) Clientelism, Credibility, and the policy choices of young democracies. American Journal of Political Science51(4): 804–821.
34.
KeeferPhilipStasavageDavid (2002) Checks and balances, private information, and the credibility of monetary commitments. International Organization26: 751–44.
35.
KleinMichael WMarionNancy P (1997) Explaining the duration of exchange rate-pegs. Journal of Development Economics54: 387–404.
36.
KrieckhausJonathan (2006) Democracy and economic growth: How regional context influences regime effects. British Journal of Political Science36: 317–340.
37.
KrugmanPaul (1979) A model of balance-of-payment crises. Journal of Money, Credit, and Banking11: 311–325.
38.
LeblangDavid (2003) To devalue or defend? The political economy of exchange rate policy. International Studies Quarterly47: 533–559.
LindbergStaffan I (2006) Democracy and Elections in Africa. Baltimore, MD: Johns Hopkins University Press.
41.
MeltzerAllanRichardScott (1981) A rational theory of the size of government. Journal of Political Economy89: 914–927.
42.
MilnerHelen VMukherjeeBumba (2009) Democratization and economic globalization. Annual Review of Political Science12: 163–81.
43.
MorrisStephenShinHyun Song (1998) Unique equilibrium in a model of self-fulfilling currency attacks. American Economic Review88: 587–597.
44.
NelsonJoan M (1990) Costa Rica, Dominican Republic, and Jamaica. In NelsonJoan M (ed.) Economic Crisis and Policy Choice. Princeton, NJ: Princeton University Press, 169–213.
45.
ObstfeldMaurice (1986) Rational and self-fulfilling balance-of-payment crisis. American Economic Review76: 72–81.
46.
PepinskyThomas B (2009) Economic Crises and the Breakdown of Authoritarian Regimes. New York: Cambridge University Press.
47.
PrzeworskiAdam (1991) Democracy and the Market. New York: Cambridge University Press.
48.
ReenockChristopherBernhardMichaelSobeckDavid (2007) Regressive socioeconomic distribution and democratic survival. International Studies Quarterly51: 677–699.
49.
ReinhartCarmen MRogoffKenneth S (2011) The modern history of exchange rate arrangements: A reinterpretation. Quarterly Journal of Economics119(1): 1–48.
50.
ResnickAdam (2001) Investors, turbulence, and transition. International Interactions27: 381–398.
RodrikDani (2006b) The social cost of foreign exchange rate reserves. International Economic Journal20: 253–266.
53.
RodrikDaniWacziargRomain (2005) Do democratic transitions produce bad economic outcomes?American Economic Review95(1): 50–55.
54.
SchamisHector E (1999) Distributional coalitions and the politics of economic reform in Latin America. World Politics51: 236–268.
55.
SimmonsBethHainmuellerJens (2005) Can Domestic Institutions Explain Exchange Rate Regime Choice? The political Economy of Monetary Institutions Reconsidered. Mimeo. Available at: http://128.118.178.162/eps/if/papers/0505/0505011.pdf
56.
SteinbergDavid A.MalhotraKrishan (2014) The effect of authoritarian regime type on exchange rate policy. World Politics66: 491–529.
57.
VreelandJames Raymond (2003) The IMF and Economic Development. New York: Cambridge University Press.
58.
WalterStefanie (2009) The limits and rewards of political opportunism: How electoral timing affects the outcome of currency crises. European Journal of Political Science48: 367–96.
59.
WeymouthStephen (2011) Political institutions and property rights: Foreign exchange commitments in 127 countries. Comparative Political Studies44: 211–40.
60.
WilsonPeterPeeblesGavin (2005) Don’t Frighten the Horse – the Political Economy of Singapore’s Foreign Exchange Rate Regime Since 1981. SCAPE Working Paper 2005/06. Available at: http://www.fas.nus.edu.sg/ecs/pub/wp-scape/0506.pdf
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
