Democracy and International Exchange Rate Regime Commitments

Abstract

Are more democratic governments associated with a larger or smaller gap between their de jure and de facto exchange rate regimes? This paper argues that more democratic governments should be associated with a larger gap because they need to use exchange rate regime commitments and actual exchange rate stability as short-term political substitutes in order to response to divided societal pressure coming through both the voter/electoral channel and the special interest channel, unlike more autocratic governments that face only one-sided political pressure through the special interest channel. Using various country/year democracy indicators and two different de facto regime measures, the statistical results show that not only are more democratic governments associated with a larger absolute regime gap, they are also associated with a larger gap in both possible directions: more actual stability than expected when they have a more flexible de jure regime and less actual stability than expected when they have a more fixed de jure regime.