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Demanding DevaluationExchange Rate Politics in the Developing World$
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David A. Steinberg

Print publication date: 2015

Print ISBN-13: 9780801453847

Published to Cornell Scholarship Online: August 2016

DOI: 10.7591/cornell/9780801453847.001.0001

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A Conditional Preference Theory of Undervalued Exchange Rates

A Conditional Preference Theory of Undervalued Exchange Rates

Chapter:
(p.20) 1 A Conditional Preference Theory of Undervalued Exchange Rates
Source:
Demanding Devaluation
Author(s):

David A. Steinberg

Publisher:
Cornell University Press
DOI:10.7591/cornell/9780801453847.003.0002

This chapter develops the conditional preference theory, which contends that the preferences of powerful interest groups are the most important driver of exchange rate policy. Those preferences, however, are not fixed or constant, as is often assumed. Rather, preferences for undervalued exchange rates are influenced by a country's institutional context. After first providing some background information about exchange rate economics, the chapter develops the conditional preference theory in four main steps. First, it explains why powerful interest groups, defined as societal actors that control many power resources, influence government decisions regarding exchange rate levels. Second it examines interest groups' preferences. Third, it explains why institutions influence interest groups' preferences. The final step in the argument puts together the two main pieces of the story—power and preferences—to explain when exchange rates are most likely to be undervalued.

Keywords:   conditional preference theory, exchange rate policy, monetary policy, interest groups, undervalued exchange rates

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