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Institutional Constraints, Mercantilism or Free Riding? The Political Economy of Changes in Global Dollar Holdings, 2000-2005

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Abstract:

Economists have debated whether or not the dollar's role as the main foreign exchange reserve asset will disappear in the next few years. Some suggest that the dollar is likely to lose its key currency role due to collective action problems, while others suggest that mercantilist preferences will lead central banks to continue acquiring dollar assets. This paper argues that a third factor, domestic and international political institutions, influences reserve policy. Institutions constrain policymakers and aggregate preferences, determining the relative strengths of free riding and mercantilist incentives in a given case. In this paper, we test these theories using monthly data on changes in holdings of US treasuries between 2000 and 2005, a period when the dollar was in nearly continuous decline. The results suggest that free riding concerns were less important than previously expected. Some support for the mercantilist thesis is found. The data provide evidence for both domestic and international institutionalist theories: central bank independence and the European Monetary Union reduce dollar holdings, while the G-7 and multiple veto institutions increase acquisitions of dollars. We draw out the implications of this finding for theory and policymakers.

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overvalu (178), currenc (150), polici (124), exchang (117), rate (114), sector (112), polit (107), veto (84), point (80), prefer (75), undervalu (64), logrol (59), agricultur (58), frieden (56), import (55), actor (51), like (49), effect (48), financi (45), use (45), institut (43),
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Name: International Studies Association 48th Annual Convention
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MLA Citation:

Shih, Victor. and Steinberg, David. "Institutional Constraints, Mercantilism or Free Riding? The Political Economy of Changes in Global Dollar Holdings, 2000-2005" Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Hilton Chicago, CHICAGO, IL, USA, Feb 28, 2007 <Not Available>. 2009-05-24 <http://www.allacademic.com/meta/p178587_index.html>

APA Citation:

Shih, V. and Steinberg, D. A. , 2007-02-28 "Institutional Constraints, Mercantilism or Free Riding? The Political Economy of Changes in Global Dollar Holdings, 2000-2005" Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Hilton Chicago, CHICAGO, IL, USA Online <PDF>. 2009-05-24 from http://www.allacademic.com/meta/p178587_index.html

Publication Type: Conference Paper/Unpublished Manuscript
Abstract: Economists have debated whether or not the dollar's role as the main foreign exchange reserve asset will disappear in the next few years. Some suggest that the dollar is likely to lose its key currency role due to collective action problems, while others suggest that mercantilist preferences will lead central banks to continue acquiring dollar assets. This paper argues that a third factor, domestic and international political institutions, influences reserve policy. Institutions constrain policymakers and aggregate preferences, determining the relative strengths of free riding and mercantilist incentives in a given case. In this paper, we test these theories using monthly data on changes in holdings of US treasuries between 2000 and 2005, a period when the dollar was in nearly continuous decline. The results suggest that free riding concerns were less important than previously expected. Some support for the mercantilist thesis is found. The data provide evidence for both domestic and international institutionalist theories: central bank independence and the European Monetary Union reduce dollar holdings, while the G-7 and multiple veto institutions increase acquisitions of dollars. We draw out the implications of this finding for theory and policymakers.

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Abstract Only All Academic Inc.
Associated Document Available International Studies Association 48th Annual Convention
Associated Document Available Political Research Online

Document Type: PDF
Page count: 45
Word count: 12768
Text sample:
Farmers versus Financiers: Logrolling and the Political Economy of Exchange Rate Overvaluation in Developing Countries* David A. Steinberg Department of Political Science Northwestern University d-steinberg@northwestern.edu Abstract: Scholars have paid limited attention to the political causes of exchange rate valuation. Existing theories do not adequately explain why overvalued currencies have been so common in developing countries. Overvaluation is a puzzling outcome: it contradicts the common assumption that states want to maximize net exports; and it has harmful economic effects such
to Speculative Market Pressure and its Effect on Policymaking” Paper Presented at the 2006 Annual Meeting of the American Political Science Association Philadelphia PA Aug. 31-Sep. 3. Weingast Barry R. 1998. “Political Stability and Civil War” in Analytic Narratives edited by Robert H. Bates et al. Princeton: Princeton University Press 148-193. Weingast Barry R. and William J. Marshall. 1988. “The Industrial Organization of Congress”. Journal of Political Economy 96 (1): 132-63 Winters Jeffrey A. 1994. “Power and the Control


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