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Interest Group Influence on Exchange Rate Policy during Speculative Attacks Stefanie Walter Swiss Federal Institute of Technology Claremont Workshop on Political Economy Data and Analysis, CGU, October 7, 2005 Motivation Policy Responses to Speculative Attacks 1970-2003 60% • Policy Options when faced with speculative attacks: – Defense of XR – Devaluation 40% • Research Question: How do private sector preferences influence the government‘s decision? 20% 0% Immediate Devaluation Failed Defense Successful Defense 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 Devaluation Defense High Low Negative Neutral Neutral Negative Previous Research Leblang (2003) Shambaugh (2004) Blomberg, Frieden, Stein (2004) Alesina/Wagner (2004) Dependent Variable similar different different similar Competitiveness exports Exports, imports, manuf. exports Manufacturing, openness, trade balance Openness, trade shocks Balance Sheets (Foreign debt) Bank lending FDI Portfolio investm. – Foreign liabilities – theory: yes, empirics: no – – Joint effect Reliance on $ Liabilities / Reliance on Domestic Currency Liabilities Joint Effects: Portfolio Defense: C: neutral B: neutral Defense: C: neutral B: neutral Devaluation: C: negative B: negative Devaluation: C: positive B: negative Defense: C: neutral B: negative Defense: C: neutral B: negative Devaluation: C: negative B: neutral Devaluation: C: positive B: neutral Reliance on Exports / Reliance on Imports C = Effect on Competitiveness B = Effect on Balance Sheets Reliance on $ Liabilities / Reliance on Domestic Currency Liabilities Portfolio Position and Preferences Reliance on Exports / Reliance on Imports 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 preferences Operationalization: • 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 mont hs after attack Compet itiveness Net foreign liabilities/M2 Constant N R2/Pseudo R2 Ordinal Policy Response -0.169** (0.07) -0.707 (0.69) 0.008* (0.00) 0.030 (0.06) -0.203*** (0.04) 273 273 0.0102 0.0034 Portfolio Position and Policy Responses to Speculative Attacks 1 0.5 0 -1 -0.5 0 -0.5 -1 Defense Failed Defense Immediate Devaluation 0.5 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
