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The Surprising Left: A Theory of Partisan Exchange Rate Policy

Thursday October 1, 2009, at 14:00
Aula 4 - IBEI
Research seminar
Tal Sadeh (Tel Aviv University - IBEI)
This study argues that under given levels of financial and trade openness left-wing governments in rich industrial democracies have a greater interest than right-wing governments in stable exchange rates. The credibility-enhancing foreign anchor improves the effectiveness of monetary surprise, which is helpful for the Left’s distributive policies. Far from deserting their traditional desire to reallocate resources in society, leftwing governments’ interest in credibility mechanisms is part of their redistribution strategy. The sensitivity of exchange rate variation to the government’s partisan bias is tested using a Prais- Winsten estimator, run on pooled cross-section time-series monthly data from 23 OECD countries during 1990- 2005. The study finds that left-wing governments’ manifestos are characterized by commitments to labor - supporting schemes, disenchantment with budget discipline and a strong currency. Left-wing governments are associated in practice with higher levels of inflation, and have a clear tendency to stabilize exchange rates against the US dollar and the British pound.