The politics of exchange rate-based stabilization versus structural reforms

In the 1990s, the choice of an appropriate exchange rate regime began to capture the attention of policy makers across Latin America. Several coun-tries pegged their currency to the U.S. dollar or even officially substituted the dollar for their national currency. Although economists and political scien-tists have made piecemeal contributions to the understanding of such policy choices, the literature currently lacks an integrated theoretical framework and a comprehensive test of alternative hypotheses. This study seeks to rectify these gaps in the literature by arguing that policy makers see the implementa-tion of fixed exchange rate regimes as a politically expedient commitment device that allows them to avoid adopting more difficult long-term adjust-ment policies designed to attain macroeconomic stability and sustainable growth. This hypothesis is tested with alternative hypotheses put forward in the burgeoning literature on exchange rate regime choice. Theoretical expec-tations are supported by the results of several logit models, which confirm some previous findings in the literature