Transcript Interest Group Influence on Exchange Rate Policy during

Interest Group Influence on
Exchange Rate Policy
during Speculative Attacks
Stefanie Walter
Swiss Federal Institute of Technology
Claremont Workshop on Political Economy Data and Analysis,
CGU, October 7, 2005
Motivation
Policy Responses to
Speculative Attacks
1970-2003
60%
• Policy Options when faced
with speculative attacks:
– Defense of XR
– Devaluation
40%
• Research Question:
How do private sector
preferences influence the
government‘s decision?
20%
0%
Immediate
Devaluation
Failed Defense
Successful
Defense
Effects of Devaluation on
Competitiveness
Reliance on Exports relative to Imports
High
Low
Devaluation
Positive
Negative
Defense
Neutral
Neutral
Effects of Devaluation on
Balance Sheets
Reliance on Foreign Currency Liabilities
relative to Domestic Currency Liabilities
Devaluation
Defense
High
Low
Negative
Neutral
Neutral
Negative
Previous Research
Leblang (2003)
Shambaugh
(2004)
Blomberg,
Frieden, Stein
(2004)
Alesina/Wagner
(2004)
Dependent
Variable
similar
different
different
similar
Competitiveness
exports
Exports,
imports,
manuf. exports
Manufacturing,
openness,
trade balance
Openness,
trade shocks
Balance
Sheets
(Foreign debt)
Bank lending
FDI
Portfolio investm.
–
Foreign
liabilities
–
theory: yes,
empirics: no
–
–
Joint effect
Reliance on $ Liabilities / Reliance on
Domestic Currency Liabilities
Joint Effects: Portfolio
Defense:
C: neutral
B: neutral
Defense:
C: neutral
B: neutral
Devaluation:
C: negative
B: negative
Devaluation:
C: positive
B: negative
Defense:
C: neutral
B: negative
Defense:
C: neutral
B: negative
Devaluation:
C: negative
B: neutral
Devaluation:
C: positive
B: neutral
Reliance on Exports / Reliance on Imports
C = Effect on
Competitiveness
B = Effect on
Balance Sheets
Reliance on $ Liabilities / Reliance on
Domestic Currency Liabilities
Portfolio Position and
Preferences
Reliance on Exports / Reliance on Imports
Case Studies
• Identify relevant groups
– Private sector interest group, urban workers etc.
• Identify these groups‘ preferences
– using portfolio approach
• Identify political influence of these groups
– Small and well organized groups vs. large and
dispersed groups, access to government etc.
Large N analysis (country level)
Idea:
• Apply portfolio-analysis to countries and
identify aggregate preferences
Operationalization:
• Reliance on exports relative to reliance on
imports
– (X-M)/GDP *(X+M)/GDP
• Reliance on $ debt relative to reliance on
domestic currency debt
– Net Private Foreign Liabilities/M2
Preliminary Results
XR change in 3
months after attack
Competitiveness
Net foreign
liabilities/M2
Constant
N
R2/Pseudo R2
Ordinal Policy
Response
-0.169**
(0.07)
-0.707
(0.69)
0.008*
(0.00)
0.030
(0.06)
-0.203***
(0.04)
273
273
0.0102
0.0034
Portfolio Position and Policy
Responses to Speculative Attacks
1
0 .5
0
-1
- 0 .5
0
- 0 .5
-1
Defense
Failed Defense
Immediate Devaluation
0 .5
Discussion
• On the aggregate, effects may cancel out
• Data on foreign debt is readily available, data
on foreign-currency-denominated debt is not.
• Variable so far does not consider net
domestic liabilities and assets
• Measurement of the joint effects