The Political Economy of Exchange Rates: How Business Interests Shape Exchange Rate Outcomes in West Africa

Abstract

The focus of this paper is on exchange rate regimes in of six West African countries that have formed the West African Monetary Zone (WAMZ); a policy domain whose heterogeneous influences are often overlooked. This thesis seeks to expand and develop knowledge on the political economy factors that influence the choice of exchange rate regimes with a special emphasis on interest group and political explanations. Building on a new and unique data set, an ordered logit model is employed to measure how business interests, political and economic variables increase the likelihood of a fixed or flexible currency regime choice. Evidence is found that business interests and political factors have indeed played a significantly more important role than economic considerations. In particular, economies with a stronger service sector tend to fix their exchange rates rather than allow them to float. Whereas right-wing governments are more prone to promote fixed exchange rates, left-wing governments favor flexible arrangements. In situations, in which civil unrest or other insurgencies occur, countries are more likely to abandon a peg for more flexible exchange rate systems. At the country level, some more distinct effects are detected. Although the empirical models include a vast number of potential predictors and run crosschecks through different specifications, the study does not argue the findings to be a result of direct causation but rather provide evidence for the underlying mechanisms in West Africa.