Summary and Keywords
Political economy research in exchange rate policy generally focuses on three particular questions. First is the question of the exchange rate regime. The exchange rate regime is the rule a government uses to determine the value of an exchange rate. The issue here is what can determine the degree of government intervention in exchange rate policy. Second, political economy research investigates the choices concerning the value or level of the exchange rate. This raises the question of how and why policy affects the relative prices of foreign and domestic goods. Finally, political economy research also investigates the nature and causes of an international monetary regime—the international principles, norms, and rules concerning monetary relations that governments and market participants expect to see others practice. International monetary regimes can be global or regional in scope, and in practice contain four elements. First, states agree to rules concerning exchange rate regimes. Second, if those rules mandate a fixed exchange rate, states agree to fix to a common “anchor” currency. Third, the international regime emphasizes particular methods for adjusting balance of payments imbalances, described below. Fourth, states agree to common procedures for resolving interstate disputes over exchange rates, through either hegemonic leadership, negotiation, supranational organizations, or rules demanding automatic responses.
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