اقتصاد سیاسی رژیم نرخ ارز در کشورهای توسعه یافته و در حال توسعه

This paper examines the influence of government ideology, political institutions and globalization on the choice of exchange rate regime via panel multinomial logit approach using annual data over the period of 1974–2004 in a panel of 180 countries: 26 developed and 154 developing. We provide evidence that government ideology, political institutions and globalization are important determinants of the choice of exchange rate regime. In particular, we find that left-wing governments, democratic institutions, central bank independence and financial development increase the likelihood of choosing a flexible regime, whereas more globalized countries have a higher probability of implementing a fixed regime. More importantly, we find that political economy factors have different effects on the choice of exchange rate regime in developed and developing countries. All our results are robust to panel ordered probit model.

The economic and political science literature emphasizes that political parties promote and advance policies in conformity with their ideology (Hibbs, 1977). Pearce (2006) explains that “governments may begin with an ideology and part of that ideology translates into policy proposals (p. 155).” In this context, political parties favor the “inherent effects of their policies and that parties have different objectives and incentives (Alesina, 1987:652).” The influential work of Hibbs (1977) first documented that left-wing governments favor relatively low unemployment, and, in turn, tolerate high rates of inflation in order to maintain low rates of unemployment. In contrast, right-wing governments prefer moderately low inflation at the expense of high rates of unemployment. In this line, left-wing parties are more averse to unemployment and less averse to inflation than the right-wing parties (Alesina, 1987). Thus, a large strand of literature has been devoted into understanding the nature and significance of government ideology in economic policy. The principal role of government in the economy is an underlying discord between right-wing and left-wing parties (Potrafke, 2010a). Right-wing governments favor protection of property rights and legal quality, while left-wing governments prefer government intervention in the economy (Bjørnskov, 2005a). Several papers, including the works of Bortolotti et al., 2003 and Potrafke, 2010a, for example, explain that right-wing governments are associated with the privatization and deregulation processes to expand the support for market-oriented reforms.1 More explicitly, market-oriented and right-wing parties promote economic freedom and prefer minimum government involvement in the economy. The empirical works of Duso, 2002, Pitlik, 2008, Bortolotti and Pinotti, 2008, Bjørnskov and Potrafke, 2011 and Potrafke, 2010a demonstrate that market-oriented and right-wing governments promote and advance privatization, liberalization and deregulation processes. Recently, exchange rate regime determination has received noteworthy academic research and discussion. The type of exchange rate regime provides essential consequences for price stability, international trade and monetary policy (Frieden et al., 2010). Thus, an extensive literature provides considerable evidence that government ideology influences the exchange rate policies. More precisely, government ideological differences across political parties create diverse attitudes in regards to policy, and, in turn, play a critically important role in determining the choice of exchange rate regime. For instance, when right-wing governments are assumed to favor low inflation, they may choose fixed exchange rate regime in order to create monetary stability; and, in turn, generate low rates of inflation (Frieden and Stein, 2001, Broz and Frieden, 2001, Levy-Yeyati et al., 2010 and Frieden et al., 2010). In a similar notion, when left-wing governments are assumed to prefer relatively low unemployment and high output, they may favor the flexible exchange rate regime to manage independent monetary policy in order to achieve its macroeconomic objectives (Broz and Frieden, 2001 and Frieden et al., 2010). In addition, the theoretical consideration of Milesi-Ferretti (1995) illustrates that a right-wing government may abstain from choosing a fixed exchange rate regime with the intention of benefiting from inflationary reputation policies of the left-wing government. Bodea (2010), who expands on the work of Milesi-Ferretti (1995), suggests that right-wing governments are typically more inclined to realign fixed exchange rates. The fundamental argument is that market-oriented governments (right-wing) favor the fixed exchange rate regime in the choice of exchange rate system, while the intervened-oriented governments (left-wing) prefer a flexible exchange rate regime. Yet, Klein and Schambaugh (2010) emphasize that the proposition that right-wing parties advance and promote the fixed exchange rate regime is not supported by many empirical studies, and, therefore, generated mixed results. Despite the great deal of academic research and discussion, the influence of government ideology on exchange rate regime choice is not straightforward, and empirical studies often produce contradictory findings.2 Earlier empirical literature has generated inconsistent results regarding the effect of ideology on the exchange rate regime, which we believe are obscured by the various econometric techniques, the choice of explanatory variables that impact exchange rate regime determination and further mitigating factors such as the linkage of exchange rate regime choice to other policies. Hence, the goal of the present paper is to examine the impact of government ideology, political institutions and globalization on the choice of exchange rate regime a country implements. The present paper contributes to the existing literature on the effects of government ideology, political institutions and globalization on the choice of exchange rate regime along several dimensions. First, we ask, does government ideology influence the choice of exchange rate regime? A review of the literature suggests that governments prefer a fixed exchange rate regime to create monetary stability, which is generally associated with low rates of inflation (Frieden and Stein, 2001, Broz and Frieden, 2001, Levy-Yeyati et al., 2010 and Frieden et al., 2010). Alternatively, the foremost benefit of a flexible exchange rate regime is to allow the government to conduct independent monetary policy (Broz and Frieden, 2001). Given that policymakers have systematically different preferences regarding macroeconomic objectives and differ in their valuation of growth, employment and price stability, policymakers may choose the exchange rate regime that conforms to their political orientation. In the interest of robustness, we use three measures of government ideology in our empirical analysis. In particular, we follow the methodology in Dreher et al., 2010, Bjørnskov, 2005b and Bjørnskov, 2008 by employing the national election results characterized in the Beck et al. (2001) Database of Political Institutions, which classifies the three largest government parties according to whether they have a left-wing, centrist or right-wing ideological orientation. Second, we examine the impact of political institutions, central bank independence and electoral motives on the type of exchange rate regime a country implements. While government ideology is one factor that can influence the choice of exchange rate policy, it may also be the case that political institutions impact the exchange rate regime determination.3 For example, democratic institutions facilitate greater information and render credible signal about policy objectives to the public than non-democracies (Fearon, 1994 and Broz, 2002). Perhaps not surprisingly, politicians in democratic institutions incur demands to employ more redistributive policies than politicians in authoritarian countries (Leblang, 1999). As such, democratic institutions may implement a flexible exchange rate regime in order to allow the government to conduct monetary policy toward domestic stabilization purposes. Further, the work of Pissarides (1980) explains that governments may potentially strive to control the economy to make them a more “popular party.” In a similar notion, Bernhard and Leblang (1999) emphasize that policymakers are disinclined to relinquish any policy instruments that can facilitate them in gaining office. That is, policymakers may influence the exchange rate regime before the elections to facilitate output growth in order to increase their probability of reelection. Thus, prior to elections, policymakers may choose the flexible exchange rate regime to allow the government to conduct monetary policy to achieve employment growth to facilitate their likelihood of reelection. Nevertheless, a credible independent central bank predictably has the ability to oppose pressures from policymakers (Klein and Schambaugh, 2010). That is, a high level of central bank independence considerably constrains the authority of policymakers to guide monetary policy for electoral intentions (Clark et al., 1998). The purpose for appointing monetary policy to a credible independent central bank is to eliminate political conflict over monetary policy decisions (Crowe, 2008). In addition, central bank independence combined with a flexible exchange rate regime delegates the accountability for monetary policy decisions exclusively to the central bank in order to promote policy independently without government intervention (Siklos, 2008). Third, we investigate the influence of globalization on the choice of exchange rate regime. The process of globalization, which integrates the world economy into a single system, may also affect the choice of exchange rate policy.4 We follow the work of McKinnon (1963), who emphasized that “openness” is an essential factor that influences the choice of exchange rate regime a country implements. More recently, Frieden (2008) argues that the process of globalization intensifies the importance of the exchange rate regime. Many countries have attempted to facilitate economic integration via trade agreements to liberalize commercial flows through reduction in tariffs. Concurrently, advancement in technology is facilitating improvement in the flows of information and of goods and services. These movements are promoting the stability and growth of an economy by creating greater efficiency in coordination and reducing the costs of transaction and transportation. In this regard, international capital mobility and global integration has challenged the ability of governments to enact national policy. Hence, open economies, which are globally integrated countries, may favor exchange rate policy that reduces risks associated with exchange rate variability that could potentially deter international trade and investment. Finally, we explore the choice of exchange rate regime determination in an unbalanced panel of 180 countries: 26 developed and 154 developing. We uncover several interesting differences in the choice of exchange rate regime in developed and developing countries. We also integrate further explanatory variables for efficient estimations results. More specifically, we incorporate explanatory variables such as the level of financial and economic development, inflation and lending interest rates. We examine the determinants of exchange rate regime via panel multinomial logit approach with fixed-effects model, where countries are allowed to choose among the exchange rate regimes. We employ panel data analysis to account for the presence of heterogeneity in the estimated parameters and dynamics across countries (Baltagi, 1995). The analysis is based upon data recorded annually over the period of 1974–2004. We utilize the de facto classification of exchange rate regime, developed and constructed by Levy-Yeyati and Sturzenegger (2005), which represents the actual classification of exchange rate regime rather than announced policies. We also estimate ordered probit model to further support the robustness of our results. Overall, we provide robust evidence that government ideology, political institutions and globalization are important determinants of the choice of exchange rate regime. In particular, we find that a left-wing government is more likely to adopt a flexible regime and less likely to implement a fixed regime. Further, we provide evidence that democratic institutions have a higher probability of choosing a flexible regime. Similarly, we also discover that politicians have a higher probability of choosing a flexible regime prior to elections. Also, central bank independence is associated with a flexible regime. More globalized countries are more likely to choose a fixed regime and no significant effect on choosing a flexible regime. More importantly, we find that political economy factors have different effects on the choice of exchange rate regime in developed and developing countries. In particular, we display that a left-wing government is more likely to choose a flexible regime in developing countries, however, no significant effect of choosing a flexible regime in developed countries. Also, our findings suggest that more globalized countries in developed economies favor a fixed regime, whereas developing economies prefer a flexible regime. Further, greater financial development in developed countries increases the probability of a flexible regime, though developing countries are more likely to choose a fixed regime. The remainder of the paper is structured as follows. In Section 2, we discuss the determinants of exchange rate regime in accordance with the previous literature. Section 3 details the econometric methodology employed in the investigation and describes the data. Section 4 presents the empirical results. The final section summarizes the major findings.

The present paper examines the effect of government ideology, political institutions and globalization on the choice of exchange rate regime. In the case of the full sample, we demonstrate that government ideology, political institutions and globalization are important determinants of the choice of exchange rate regime. In particular, we provide evidence that a left-wing government is more likely to implement a flexible regime and less likely to implement a fixed regime. Further, we show that democratic institutions, election motives, central bank independence and greater financial development increase the likelihood of choosing a flexible regime. We also display that more globalized countries have a higher probability of choosing a fixed regime and economies with higher rates of inflation are less likely to implement a fixed regime. Finally, countries that experience higher level of economic development are less likely to choose a flexible regime. Next, we uncover several differences on the choice of exchange rate regime in our sample of developing and developed countries. For example, we show that a left-wing government in a developing economy is more likely to choose a flexible regime. For developed countries, a left-wing government decreases the probability of choosing a fixed regime and no significant effect of choosing a flexible regime. Also, our findings suggest that more globalized countries in developed economies favor a fixed regime, whereas developing economies prefer a flexible regime. Further, greater financial development in developed countries increases the probability of a flexible regime, though developing countries are more likely to choose a fixed regime. We also show that economic development decreases the probability of a flexible regime in developing countries. In addition, higher rates of inflation in developing countries decrease the likelihood of a fixed regime. In contrast, the level of economic development and inflation rate does not impact the choice of exchange rate regime in developed countries. Finally, we discover that higher level of domestic interest rates in developed countries is more likely to choose a flexible regime. This effect is not, however, statistically significant for developing countries. More importantly, our estimated results are robust to the dependent variable de facto exchange rate regime 5-ways classification, and the results from the robustness estimation provide strong evidence that our findings are robust in accordance with our baseline specification. To sum, we find that government ideology, political institutions and globalization are fundamental determinants of the type of exchange rate regime a country implements. More importantly, we highlight that political economy factors have different effects on the choice of exchange rate regime in developed and developing countries. It is therefore critically important to account for the political economy variables in exchange rate policy decisions. In addition, we emphasize the significance of examining the developed and developing country samples in order to devise adequate exchange rate policies, as we propose these implications for further research.