The Effects of Government Forms on Exchange Rate Devaluations in Developing Countries

Abstract

Despite voluminous literature regarding economic determinants of exchange rate policies, very little attention has been given to the effects of the formal criteria of constitution. Moreover, political determinants have been mainly used to explain the exchange rate regime choices in specific regions. The purpose of this paper is to show how the presidential system affects the exchange rate devaluation decisions as one of the formal constitutional features. The results suggest that the presidential system provides the incumbents with more room for incurring the political costs of devaluation. Moreover, the newly elected presidents are less likely to be vulnerable to costly devaluation. The underlying mechanism emphasized in this paper is the flexibility of election possibility. Electoral concerns present different incentives to incumbents in the sense that the incumbents with fixed terms (presidentialism) are less vulnerable to costly policies than the ones with flexible terms. The results also suggest that the strength of government is positively related to devaluation decisions. In particular, strong presidential governments substantially increase the probability of devaluations.