The political choice and collapse of fixed exchange rates

Evidence suggests there is a strong tendency among states to choose fixed exchange rates. Yet he interpretation of fixed exchange rates as a monetary policy rule remains unconvincing. Adopting an endogenous policy perspective, this paper argues that political-support maximizing governments choose fixed exchange rates to benefit domestic interest groups. Exogenous shocks, however, may change domestic political equilibria, causing the collapse of international arrangements and the switch to flexible exchange rates. Institutional pecularities make monetary unification a special case in this cycle.