The Political Economy of Exchange Rates

The exchange rate is the most important price in any economy, for it affects all other prices. In most countries, policy toward the national currency is prominent and controversial. Economic epochs are often characterized by the prevailing exchange rate system—the Gold Standard Era, the Bretton Woods Era. Contemporary developments , from the creation of an Economic and Monetary Union in Europe to successive waves of currency crises, reinforce the centrality of exchange rates to economic trends. The analysis of the political economy of currency policy has focused on two sets of questions. The first is global, and has to do with the character of the international monetary system. The second is national, and has to do with the policy of particular governments towards their exchange rates. These two interact. National policies, especially of large countries, have an impact on the international monetary system. By the same token, the global monetary regime influences national policy choice. At the frontiers of research, political economists are grappling with the complexities of this interaction, analyzing the linkages between the international and domestic aspects of exchange rate policy-making. In this essay, we start by separating the analysis of the international monetary system from the analysis of the policy choices of national governments. This allows us to simplify the issues in each area and present them in generic political economy terms. We then discuss how the issues might be analyzed jointly, across the domains, in the next phase of research.