Minority Governments and Exchange Rate Regimes
| Author | Bumba Mukherjee,David Leblang |
| DOI | 10.1177/1465116506069438 |
| Published date | 01 December 2006 |
| Date | 01 December 2006 |
| Subject Matter | Articles |
Minority Governments and
Exchange Rate Regimes
Examining Evidence from 21 OECD
Countries, 1975–1999
Bumba Mukherjee
Princeton University, USA
David Leblang
University of Colorado, USA
ABSTRACT
We examine the impact of minority governments on the
choice of exchange rate regime in advanced OECD democ-
racies after the collapse of the Bretton Woods system. We
demonstrate that leaders of minority governments had a
lower political discount factor in office than majority govern-
ments across advanced OECD democracies and use that
finding to motivate a model. The model predicts that leaders
of minority governments had strong incentives to switch
from a fixed to a floating exchange rate because of a lower
discount factor in office. Results from Markov transition
models estimated on de facto exchange rates adopted by
OECD and West European OECD countries between 1975
and 1999 provide robust statistical support for the model’s
prediction. We also briefly discuss how the findings
presented in this paper have important implications for
understanding the likelihood of expansion of Economic and
Monetary Union (EMU) to new democracies in Central and
Eastern Europe in the near future.
450
European Union Politics
DOI: 10.1177/1465116506069438
Volume 7 (4): 450–476
Copyright© 2006
SAGE Publications
London, Thousand Oaks CA,
New Delhi
KEY WORDS
floating exchange rate
minority government
Markov model
Introduction
After the Bretton Woods system collapsed in 1973, foreign exchange markets
witnessed remarkable variation in the type of exchange rate regime adopted
by advanced industrial OECD democracies. Within Western Europe,
Germany, Belgium, the Netherlands and Spain committed themselves to a
fixed exchange rate system whereas the United Kingdom, Iceland and
Norway maintained either managed or freely floating exchange rates. Non-
European OECD countries such as Australia (since 1982) and Japan (since
1977) have consistently opted for a floating exchange rate, and Canada has
pegged its currency to the US dollar since 1970. What explains this variation
in exchange rate regime choice by advanced OECD democracies from the
1970s to the late 1990s?
Scholars have put forward several answers to address this question.
Some suggest that government partisanship, electoral systems or interest
groups explain why some OECD countries opted for fixed exchange rates
whereas other countries adopted a floating exchange rate after 1973
(Bernhard and Leblang, 1999; Garrett, 1995; Frieden, 2002; Simmons, 1994).
Others argue that the number of veto players in government or the credi-
bility of commitments to fixed exchange rates influenced exchange rate
regime choice (Hallerberg, 2002).
Extant studies of the domestic politics of monetary policy are undoubt-
edly insightful. However, a key weakness in existing studies is that scholars
have not examined how the legislative status of the ruling party (or parties) as
a majority or minority government in advanced OECD democracies may have
affected the choice of exchange rate regime. This is surprising because the
formation of minority governments is quite common in advanced industrial
OECD democracies and especially in OECD nations within Western Europe.
Consider, for example, the descriptive data in Table 1, which reports the
frequency of minority governments in 21 advanced industrial OECD democ-
racies between 1946 and 1999. We find that roughly 3 to 4 out of every 10
governments in advanced OECD democracies were minority governments
during the 1946 to 1999 period. The data in Table 1 also indicate that minority
government is the norm rather than the exception in Denmark, Norway, Spain
and Sweden. Minority governments constituted about 50% of all governments
in Ireland, and 25–30% of all governments in France and Japan.
But minority governments are common not only to advanced industrial
OECD democracies. Indeed, a study by Harfst (2002) suggests that minority
governments often assume office in the new fledgling democracies of Eastern
Europe. The fact that minority governments assume office in the advanced
industrial OECD world as well as in the new democracies of Eastern Europe
Mukherjee and Leblang Minority Governments and Exchange Rate 451
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