The politics of exchange rate-based stabilization versus structural reforms in Latin America

In the 1990s, the choice of an appropriate exchange rate regime began to capture the attention of policy makers across Latin America. Several countries pegged their currency to the U.S. dollar or even officially substituted the dollar for their national currency. Although economists and political scientists 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 implementation of fixed exchange rate regimes as a politically expedient commitment device that allows them to avoid adopting more difficult long-term adjustment 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 expectations are supported by the results of several logit models, which confirm some previous findings in the literature.