A New Approach for Determining Exchange-Rate Level Preferences

Abstract

In research on the political economy of exchange rates, a good understanding of who will endorse and who will oppose certain exchange-rate policies is central to understanding how actual exchange-rate policies are made and how the global exchange-rate system changes over time. Since existing classifications of exchange-rate level preferences have several shortcomings, this article proposes a new and more nuanced strategy for identifying preferences on exchange-rate valuation. This approach takes into account the complex interrelationship between exchange-rate and monetary policy, and the effects of these policies on balance sheets. In addition, the approach accounts for the dynamics of preference formation and change. Comparative case studies of currency crises in Hong Kong, South Korea, Thailand, and Taiwan show that considering actors' vulnerabilities to exchange-rate and interest-rate changes enhances understanding of their exchange-rate level preferences. The case studies also indicate that societal preferences affect policy outcomes. Exchange-rate stability was maintained in countries where private actors' vulnerabilities to depreciation were high. However, when pressure intensified, exchange rates were subsequently depreciated in countries where vulnerabilities to a monetary tightening exceeded the potential costs of depreciation.