Risky Signals: The Political Costs of Exchange Rate Policy in Post-Communist Countries

It can be risky for governments to renege on exchange rate commitments, but it is misleading to characterize the costs as audience costs. While an audience costs approach assumes that the punishment for reneging is automatic, we model the choice of exchange rate policy in the shadow of elections as...

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Bibliographic Details
Published in:International studies quarterly 2013-09, Vol.57 (3), p.519-531
Main Authors: Bagashka, Tanya, Stone, Randall W.
Format: Article
Language:English
Subjects:
Audiences
Commitments
Communism
Cost
Cues
Democracy
Economic inflation
Economic models
Economic policy
Elections
Exchange Rate
Exchange rates
Fixed exchange rates
Foreign exchange rates
Foreign policy
Hypothesis
Incumbents
International studies
Parliamentary system
Political partisanship
Post-communism
Post-communist societies
Postcommunism
Postcommunist Societies
Punishment
Risk assessment
Voters
Voting
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Summary:It can be risky for governments to renege on exchange rate commitments, but it is misleading to characterize the costs as audience costs. While an audience costs approach assumes that the punishment for reneging is automatic, we model the choice of exchange rate policy in the shadow of elections as a signaling game between voters and governments, where governments have private information and voters are rational. We find that voters draw different inferences when they see reneging by different actors, and only Left governments are punished for breaking their promises. We test this hypothesis in the context of the post-Communist countries from 1990 to 2007 and find that Left governments were more likely to fall if they reneged on exchange rate commitments, but Right governments were not.
ISSN:0020-8833
1468-2478
DOI:10.1111/isqu.12018