Political Survival, Domestic Institutions, and Exchange Rate Commitments

Bernhard and Leblang (1999) argue that since adopting a pegged exchange rate in an era of mobile capital inhibits the use of monetary policy for electoral purposes, elements of domestic political institutions that influence the expected utility of controlling office ought to help determine the choice of exchange rate regime. Clark (2001) argues that since adopting a pegged exchange rate enhances the effectiveness of fiscal policy when capital is mobile, there is no direct relationship between the choice of exchange rate regime and the institutions Bernhard and Leblang identify. This paper presents evidence that incumbents facing an independent central bank are more likely to peg the exchange rate and that the domestic institutions identified by Bernhard and Leblang influence the choice of exchange rate indirectly, through their effect on the degree of central bank independence. 1 Paper prepared for presentation at the American Political Science Association annual meeting. San