Democracy and markets: The case of exchange rates

John R. Freeman, Jude C. Hays, Helmut Stix

Research output: Contribution to journalArticlepeer-review

48 Scopus citations

Abstract

The relationships between the workings of democratic institutions and currency markets are studied. Several competing propositions about how political (re)equilibration affects currency markets are derived and tested. The results support the view that democratic politics affects currency markets. Expectations and uncertainty about electoral outcomes and government survival affect the probability of switching between currency-market equilibria. Additionally, opinion polls about chief executive performance have a direct effect on the probabilities of switches between currency regimes suggesting that these polls cause currency traders to revise their expectations about the stability of governments and (or) the contents of public policies. Electoral institutions mitigate the impact of politics on currency-market equilibria. Political effects are weaker in countries with proportional representation electoral systems than in countries with majority-plurality systems. There is less evidence that central-bank independence, consensual-corporatist systems, or "political coherency" reduces the effect of politics on currency markets.

Original languageEnglish (US)
Pages (from-to)449-468
Number of pages20
JournalAmerican Journal of Political Science
Volume44
Issue number3
DOIs
StatePublished - Jul 2000

Fingerprint

Dive into the research topics of 'Democracy and markets: The case of exchange rates'. Together they form a unique fingerprint.

Cite this