Bolten, Annika
(2009)
Pegs, politics and petrification: exchange rate policy in Argentina and Brazil since the 1980s.
PhD thesis, London School of Economics and Political Science.
Abstract
Currency crises have long constituted one of the most important sources of politicoeconomic
instability across middle-income emerging markets, with exchange rate pegs having
been identified as key culprits. Given pegs’ propensity for boom-bust-cycles, it is thus
puzzling that governments insist on implementing such constraining regimes and, more
importantly, that they tend to postpone exchange rate flexibilisation until a disorderly exit
becomes inevitable. This thesis addresses as its core puzzle exchange regime choice in middleincome
emerging markets in Latin America, and especially the phenomenon of ‘exchange rate
petrification’, by examining the tumultuous exchange rate history of Argentina and Brazil.
Adopting a qualitative approach and using comparisons between periods and countries, it
traces the process of exchange rate policymaking on the basis of participant interviews and
archival and media research over a period ranging from re-democratisation in the early 1980s,
through the decade of structural reforms under nominal exchange rate anchors in the 1990s
until the crisis exits to inflation-targeting under ‘dirty floats’ in the new millennium.
The study shows that existing studies, which narrowly focus on electoral opportunism,
credibility-building motivations or structurally-determined interest group pressures derived
from OECD contexts, fail to capture the reality of emerging market exchange rate politics,
their distinct economic structural context and the inter-relationship between exchange rate
policy and executives’ structural reform endeavours. Instead, the analysis suggests that only a
model of exchange rate politics that centres on intra-executive dynamics, but incorporates
their interplay with societal cleavages and the role of international financial institutions, can
account for the countries’ divergent exchange rate policy and especially the differential
severity of ‘exchange rate petrification’.
Using the cases of Argentina and Brazil as a backdrop, the thesis offers an explanation for the
problematic nature of exchange rate pegs that goes beyond the analysis offered by the
economics literature, and instead highlights their inherently political nature insofar as national
governments conceive of nominal pegs as coalition-building devices in the context of
politically controversial structural reforms. Aside from structural factors, such as liability
dollarisation, it is governments’ reluctance to surrender this political instrument that
perpetuates ‘exchange rate petrification’. As ‘exchange rate petrification’ presupposes the
absence of sustained exchange rate politicisation, the thesis also refines the literature’s
exchange rate politicisation hypothesis by incorporating several intervening variables, such as
the institutional structure of organised society, the nature of the political system and ideational
factors, which may mute calls for exchange regime change and thus generate permissive
circumstances for exchange rate pegs to petrify.
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