A Political Explanation for Exchange-Rate Regime Gaps

Abstract

Why do certain governments often have an actual exchange-rate policy that differs from their official declaration, creating a gap between their de jure and de facto exchange-rate regimes? This article offers a political explanation centered on the need for certain types of government to respond to a broader set of societal actors with different preferences concerning the exchange-rate regime. The argument posits that more democratic governments must respond to a broader set of societal actors, thus leading them to use their de jure and de facto regimes as short-term political substitutes. In using one regime (either de jure or de facto) to appeal to one group of societal actors and the other regime to appeal to another group with different preferences, exchange-rate regimes are hypothesized to be more frequent for more democratic governments. The statistic evidence accords with this expectation.