Interest Group Influence on Exchange Rate Policy

during Speculative Attacks

Stefanie WalterSwiss Federal Institute of Technology

Claremont Workshop on Political Economy Data and Analysis,

CGU, October 7, 2005

Motivation

• Policy Options when faced with speculative attacks:– Defense of XR– Devaluation

• Research Question:

How do private sector preferences influence the government‘s decision?

Policy Responses to Speculative Attacks

1970-2003

0%

20%

40%

60%

ImmediateDevaluation

Failed Defense SuccessfulDefense

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

High Low

Devaluation Negative Neutral

Defense Neutral Negative

Previous Research

Leblang (2003) Shambaugh (2004)

Blomberg, Frieden, Stein (2004)

Alesina/Wagner (2004)

Dependent Variable

similar different different similar

Competi-tiveness

exports Exports,

imports,

manuf. exports

Manufacturing,

openness,

trade balance

Openness,

trade shocks

Balance Sheets

(Foreign debt) Bank lending

FDI

Portfolio investm.

– Foreign liabilities

Joint effect – theory: yes, empirics: no

– –

Joint Effects: Portfolio

Defense: C: neutral B: neutral

Devaluation: C: negative B: negative

Reliance on Exports / Reliance on Imports

Rel

ianc

e on

$ L

iabi

litie

s / R

elia

nce

on

Dom

estic

Cur

renc

y Li

abili

ties

Defense: C: neutral B: negative

Devaluation: C: negative B: neutral

Defense: C: neutral B: neutral

Devaluation: C: positive B: negative

Defense: C: neutral B: negative

Devaluation: C: positive B: neutral

C = Effect on Competitiveness

B = Effect on Balance Sheets

Portfolio Position and Preferences

Defen

se

Deval

uatio

n

Indi

ffere

nce

Reliance on Exports / Reliance on Imports

Rel

ianc

e on

$ L

iabi

litie

s / R

elia

nce

on

Dom

estic

Cur

renc

y Li

abili

ties

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 preferencesOperationalization:• 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

Ordinal Policy Response

Competitiveness -0.169** (0.07)

-0.707 (0.69)

Net foreign liabilities/M2

0.008* (0.00)

0.030 (0.06)

Constant -0.203*** (0.04)

N 273 273

R2/Pseudo R2 0.0102 0.0034

Portfolio Position and Policy Responses to Speculative Attacks

-1

-0.5

0

0.5

1

-1 -0.5 0 0.5

Defense Failed Defense Immediate Devaluation

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