اولویت های بانک مرکزی و حزب گرایی چپ / راست از نرخ ارز

This study argues that when central banks subordinate all policy goals to achieving price stability greater central bank independence encourages left-wing governments to seek greater exchange rate stability. Such central bank policy priorities make the Left's preferred distributive policies more dependent on the effectiveness of fiscal policy, which under high capital mobility increases with exchange rate stability. In contrast, right-wing governments put greater emphasis on market adjustments and price stability. Hypotheses are tested by estimating the sensitivity of exchange rate variation to partisanship, central bank independence, and the salience of price stability, using a Prais–Winsten estimator and Instrumented Variables, run on pooled cross-section time-series data from 22 OECD countries during 1990–2004.

Ever since Hibbs's (1977) seminal contribution it has been argued that political agendas determine macroeconomic and, other scholars added, exchange rate policies. Right-wing parties are conventionally viewed as more inflation-averse than left-wing parties, and likelier to fix exchange rates and refrain from fiscal or monetary policies that attempt to redistribute market-allocated resources. Left-wing governments in contrast tend to focus their macroeconomic policies on job creation rather than on disinflation and thus suffer from low policy credibility and low investor confidence (Alesina & Sachs, 1988). Indeed, some empirical studies find that in industrial democracies left-wing governments are associated with more debt in attempt to cushion the effects of international trade, higher inflation (Alesina & Roubini, 1997), depreciation of the currency, and greater probability of speculative attacks on the exchange rate (Leblang, 2002). However, left-wing governments may have a greater need for an exchange rate peg as a disciplining mechanism (policy anchor) precisely because they suffer from lower credibility in their macroeconomic polices. Thus, other empirical studies find that left-wing governments are actually associated with a lower rate of depreciation in the short term (Frieden, 2002), and greater efforts to defend a peg against speculative attacks (Leblang, 2003). In short, policy-makers, especially of the left wing, face a dilemma: to be effective a policy needs credibility, but efforts to earn this credibility restrict their ability to achieve other policy goals. This dilemma is complicated by the interactions among various relevant institutions, such as central bank independence and official controls on capital mobility (capital controls). The choices with regard to central-bank independence and an exchange rate peg are interdependent (Bernhard, Broz, & Clark, 2002): choosing the former may obviate the government's need for the discipline of the latter. In contrast, according to the Mundell–Fleming model, under high capital mobility fiscal policy is more effective when exchange rates are fixed. Thus, as central bank independence increases, left-wing governments are likelier to fix exchange rate for the sake of distributive policies (O’Mahony, 2007). This study argues that the level of the central bank's independence and its policy priorities affect the relationship between the government's partisan bias and the level of actual exchange rate stability in democratic market economies. All else equal, as central banks become more independent left-wing governments are associated with more volatile exchange rates than right-wing governments, because these are mostly alternative mechanisms for credibility. In addition, foreign exchange markets are more suspicious of left-wing governments and tend to be more volatile without a firm commitment by the government. However, this study further argues that when central banks subordinate all policy goals to achieving price stability greater central bank independence encourages left-wing governments to seek greater exchange rate stability. Such policy priorities on the part of the central bank make distributive policies and macroeconomic activism more dependent on fiscal policy, the effectiveness of which under high capital mobility increases with exchange rate stability. This approach to exchange rates is less common among right-wing governments, which put greater emphasis on market mechanisms of adjustment in response to economic shocks. To support its argument this study estimates the sensitivity of market-determined exchange rate variation to partisanship and central bank independence, while controlling for other political and economic determinants of exchange rate variation. The rest of the paper proceeds as follows. Section 2 develops the paper's theoretical argument and its hypotheses. Section 3 describes the sample used for testing the hypotheses, the estimation method, and the choice of dependent, independent and control variables. Section 4 tests the hypotheses with Instrumented Variables (IV) using a Prais–Winsten estimator based on pooled cross-section time-series data from 22 OECD countries during 1990–2004. Section 5 presents conclusions.

Partisanship is an important causal source of exchange rate variation. However, its effect is intermediated by institutions such as capital mobility, central bank independence and policy orientation of the central bank. This study distinguishes mere independence in the bank's decision making from its policy priorities. Experience shows that central banks can be highly independent in formulating their policies and refuse to print money to finance the government's debt, with or without a commitment to price stability as the prime policy objective. If the central bank's policy priorities are not controlled for, the evidence in this study shows that under a fully dependent central bank, left-wing governments are associated with more stable exchange rates than are right-wing governments. In addition it is shown that the more central banks become independent the more volatile exchange rates become under a left-wing government, as some of the recent contributions to partisanship theory predict. The evidence in this study further shows that when central banks are very independent in their decision-making, the more they emphasize price stability among other policy objectives, the more left-wing governments become associated with stable exchange rates. This was explained by the interest of such governments in the effectiveness of short-term fiscal measures for the benefit of employment and wages. If the central bank is focused on price stability it can provide only limited assistance for labor. This leaves a left-wing government with fiscal policy as the major or only tool for carrying out their distributive policies. Under high capital mobility the effectiveness of fiscal policy in turn depends on stable exchange rates. By the same token a government that has opted for fixed exchange rates as a mechanism for discipline under full capital mobility has already given up control of monetary policy because of the mechanics of the ‘unholy triangle’ and would lose nothing by accepting greater central bank independence. A left-wing government would be expected to shed even fewer tears on the lost autonomy of the central bank the more it is committed to price stability, which is not known to be among the policy priorities of the left. It is even possible that a left-wing government chooses to make its central bank independent and price-stability oriented in order to impress investors, and at the same time neutralizes the bank's ability to manage an autonomous policy by fixing the exchange rate. So again, prioritizing price stability and stabilizing exchange rates are associated policies from a left-wing point of view. In contrast, independent central banks that pursue price stability do not pose such a policy dilemma for right-wing governments because price stability is anyway on their partisan agendas and because their preference for market mechanisms and labor market flexibility in effecting economic adjustments reduces their reliance on fiscal policy when facing economic shocks. The findings of this study carry some interesting implications for the European Union's (EU) single currency. The preference for stable exchange rates is expected to be shared by left-wing governments in all EU member states, whether they are part of the euro zone or not, because since 1999 all EU member states, with the exception of the UK, are required to make their central banks independent and adopt price stability as their prime policy objective. One possible implication of this study's results is that the euro zone has a soft gravitational pull on left-wing governments outside it, but not on Britain's Labor Party. Similarly, the inability to gain control over the central bank and change its policy priorities by withdrawing from the euro zone weakens the interest in leaving the euro zone for left-wing governments in participating countries. Thus, paradoxically a project that is considered by many to have institutionalized a right-wing agenda in the EU's political-economy, ex post gains some support from the left as well. Of course, the Stability and Growth Pact (SGP) limits budget deficits to no more than 3 percent of GDP, and this could be argued to reduce the interest of left-wing governments in EU member states in stabilizing exchange rates. However, that limit should still leave enough room for fiscal maneuver for left-wing governments to care about, if balanced budgets are maintained in the long run. Anyway, the SGP has always left ample legal room for political maneuvers. Further development of the literature on partisan exchange rate politics could benefit from careful treatment of endogenous variables as well as more emphasis on actual exchange rate variation rather than declared policies. More important, the level of capital mobility should be controlled for, as well as the mediating role of various institutions between the partisan agenda of the government and observed reality.