Mundell-Fleming framework:
-posits that with international capital mobility govs must choose between monetary policy
autonomy and Exchange rate (ER) stability.
If govs wish to stabilize ERs then they must move national interest rates in line with the
prevailing world int. rate this is called monetary convergence. If national IRs diverge from
world capital flows will put pressure on ERs leading to currency instability.
-Frieden posited that inter. Oriented producers prefer monetary convergence for ER stability,
domestically oriented prefer monetary autonomy, accepting costs of greater ER instability.
-lack of evidence of societal lobbying of policymakers.
-posits party-as-agent framework where parties represent domestic interest groups. This is
consistent with findings that size of interest group and its power does not matter if their party is
not in power. Suggests that societal lobbying is costly and so lobbying for ER stability and
competitiveness likely when right-govs not working towards this objective.
Societal preferences: which groups matter?
-Economic sectors: capital and labour in a given sector expected to unite, import-competing
producers and producers of nontradeable services hold preferences for national monetary
autonomy, export-oriented and international investors prefer monetary convergence because
currency movements may negatively affect their cross-border business activities. Banks have
been rendered insolvent by volatility, stability is safer for banks and better profit prospects under
monetary convergence and capital mobility.
-Production factors:
-Heckscher -Ohlin model, factors of production can move without cost across sectors and so
factor returns become equalized across sectors of economy. Capital and labour have divergent
interests regarding national economic policy. Capital not tied with local economy and thus may
have little interest in monetary autonomy, can be expected to value of monetary convergence so
far as it facilitates free movement of money. Labour is tied to local economy and thus should
have strong interest in maintaining domestic monetary autonomy.
How do societal preferences matter?:
-economic pluralism: govs will make greater efforts to stabilize Ers as international trade and
investment grow, reflecting growing influence of exporters and international investors.
-state is a weak actor in this model, gov processes societal imputes into output that is policy. Gov
said to have little interest in policy itself.
-one issue of this model is that large societal groups face collective action problems, it could
even be thought that smaller groups could be more effective in obtaining their preferred
monetary or ER outcomes.
-political party as solution to this collective action problem.
-party-as-agent framework: partisan character of gov in power may be more important than
group size.
-principle-agent arrangement, in western countries often ideological political parties. Part not just
vote-maximizing but care about policy outcomes of their core supporters. Class line
identification of parties, leftist for labour and rightist for capital. Also, evidence to support
sectoral partisan affiliations.
-posits that with international capital mobility govs must choose between monetary policy
autonomy and Exchange rate (ER) stability.
If govs wish to stabilize ERs then they must move national interest rates in line with the
prevailing world int. rate this is called monetary convergence. If national IRs diverge from
world capital flows will put pressure on ERs leading to currency instability.
-Frieden posited that inter. Oriented producers prefer monetary convergence for ER stability,
domestically oriented prefer monetary autonomy, accepting costs of greater ER instability.
-lack of evidence of societal lobbying of policymakers.
-posits party-as-agent framework where parties represent domestic interest groups. This is
consistent with findings that size of interest group and its power does not matter if their party is
not in power. Suggests that societal lobbying is costly and so lobbying for ER stability and
competitiveness likely when right-govs not working towards this objective.
Societal preferences: which groups matter?
-Economic sectors: capital and labour in a given sector expected to unite, import-competing
producers and producers of nontradeable services hold preferences for national monetary
autonomy, export-oriented and international investors prefer monetary convergence because
currency movements may negatively affect their cross-border business activities. Banks have
been rendered insolvent by volatility, stability is safer for banks and better profit prospects under
monetary convergence and capital mobility.
-Production factors:
-Heckscher -Ohlin model, factors of production can move without cost across sectors and so
factor returns become equalized across sectors of economy. Capital and labour have divergent
interests regarding national economic policy. Capital not tied with local economy and thus may
have little interest in monetary autonomy, can be expected to value of monetary convergence so
far as it facilitates free movement of money. Labour is tied to local economy and thus should
have strong interest in maintaining domestic monetary autonomy.
How do societal preferences matter?:
-economic pluralism: govs will make greater efforts to stabilize Ers as international trade and
investment grow, reflecting growing influence of exporters and international investors.
-state is a weak actor in this model, gov processes societal imputes into output that is policy. Gov
said to have little interest in policy itself.
-one issue of this model is that large societal groups face collective action problems, it could
even be thought that smaller groups could be more effective in obtaining their preferred
monetary or ER outcomes.
-political party as solution to this collective action problem.
-party-as-agent framework: partisan character of gov in power may be more important than
group size.
-principle-agent arrangement, in western countries often ideological political parties. Part not just
vote-maximizing but care about policy outcomes of their core supporters. Class line
identification of parties, leftist for labour and rightist for capital. Also, evidence to support
sectoral partisan affiliations.
