Democratization and exchange rates

Abstract

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] Vast literature in political economy largely overlooks the linkage between democratization and exchange rate policies. The dissertation fills this lacuna by squarely theorizing and testing the relationship between these two increasingly important phenomena. One important characteristic of young democracies upon which the dissertation's substantive empirical analyses are predicated is the strong public demand for monetary and fiscal expansion. Democratization unleashes the pent-up demand of those who were economically and politically excluded under authoritarian rules for economic redistribution. This strong pressure for expansionary policies separates young democracies not only from autocracies, where political leaders' fate is generally independent of public demand, but also from established democracies, where years of experience of democratic politics equipped the regime with institutional mechanisms to mitigate such pressures. With this simple theoretical framework, the dissertation studies three discrete stages of exchange rate policymaking processes. It finds that newly democratized countries are more likely than those with other types of political regimes 1 ) to have de fact flexible and de jure fixed exchange rate regimes, a combination of exchange rate policies also known as "fear of pegging", 2) to present high likelihood of currency devaluation upon speculative attacks on their currencies, and 3) to have high probability of currency crises particularly in the Latin American context.