Monetary Divergence
Michigan Studies in International Political Economy SERIES EDITORS: Edward Mansfield and Lisa Martin Michael J. Gilligan Empowering Exporters: Reciprocity, Delegation, and Collective Action in American Trade Policy Barry Eichengreen and Jeffry Frieden, Editors Forging an Integrated Europe Thomas H. Oatley Monetary Politics: Exchange Rate Cooperation in the European Union Robert Pahre Leading Questions: How Hegemony Affects the International Political Economy Andrew C. Sobel State Institutions, Private Incentives, Global Capital Roland Stephen Vehicle of Influence: Building a European Car Market William Bernhard Banking on Reform: Political Parties and Central Bank Independence in the Industrial Democracies William Roberts Clark Capitalism, Not Globalism: Capital Mobility, Central Bank Independence, and the Political Control of the Economy Edward D. Mansfield and Brian M. Pollins, Editors Economic Interdependence and International Conflict: New Perspectives on an Enduring Debate Kerry A. Chase Trading Blocs: States, Firms, and Regions in the World Economy Monetary Divergence: Domestic Policy Autonomy in the Post Bretton Woods Era
Monetary Divergence Domestic Policy Autonomy in the Post Bretton Woods Era DAVID H. BEARCE Ann Arbor
Copyright by the University of Michigan 2007 All rights reserved Published in the United States of America by Manufactured in the United States of America c Printed on acid-free paper 2010 2009 2008 2007 4 3 2 1 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, or otherwise, without the written permission of the publisher. A CIP catalog record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Bearce, David H., 1967 Monetary divergence : domestic policy autonomy in the post Bretton Woods era /. p. cm. (Michigan studies in international political economy) Includes bibliographical references and index. ISBN-13: 978-0-472-09961-0 (cloth : alk. paper) ISBN-10: 0-472-09961-2 (cloth : alk. paper) ISBN-13: 978-0-472-06961-3 (pbk. : alk. paper) ISBN-10: 0-472-06961-6 (pbk. : alk. paper) 1. Monetary policy History 20th century. 2. International finance History 20th century. 3. Macroeconomics History 20th century. I. Title. II. Series. HG230.3.B43 2007 339.5'3 dc22 2006015258
To Dana, whose loving support made this book and everything else possible
Contents List of Tables List of Figures Acknowledgments ix xi xiii Chapter 1 Introduction 1 Chapter 2 The Monetary Convergence Hypothesis 13 Chapter 3 Evidence of Monetary Divergence 31 Chapter 4 From Fiscal to Monetary Divergence 53 Chapter 5 Explaining Divergence in the Policy Mix 73 Chapter 6 Illustrating Partisan Divergence in the Policy Mix 99 Chapter 7 Expanding the Argument 125 References 139 Index 153
Tables 1. Three Waves of Political Science Literature on Monetary Policy Convergence 2 2. Estimates of the Trade-off between Monetary Autonomy and Exchange Rate Variability 42 3. Estimates of Government Spending on the Policy Interest Rate 65 4. Hypothesized Relationships between Domestic Political Factors and National Policy Instruments and Exchange Rate Variability 89 5. Estimates of Domestic Political Factors on National Policy Instruments and Exchange Rate Variability 92 6. Three Theories of Partisan Economic Policy Goals and Instruments 94
Figures 1. Three International Monetary Policy Orientations 17 2. Examples of Different International Monetary Orientations 18 3. The International Monetary Orientation Predicted by the Systematic Monetary Policy Convergence Hypothesis 21 4. Average OECD Exchange Rate Variability, 1973 97 39 5. Average OECD Financial Openness, 1973 93 43 6. The Marginal Effect of Monetary Autonomy (MONAUT) on Exchange Rate Variability (EXRCV) 44 7. The Hypothesized Trend toward Systematic Monetary Policy Convergence 47 8. Average OECD Nominal Interest Rate Differential, 1973 97 49 9. Variation in OECD Monetary Autonomy, 1973 97 50 10. Different Fiscal and Monetary Policy Mixes 60 11. The Fiscal and Monetary Strategic Game 61 12. Internal Policy Choices Leading to External Policy Convergence 68 13. Internal Policy Choices Leading to Domestic Policy Autonomy 69 14. Exchange Rate Stability and the Policy Mix 70 15. Linking Fiscal Policy, Monetary Policy, and Exchange Rate Stability 75 16. Partisan Policy Mix Divergence 97 17. Identifying the French and British Cases 101 18. French Monetary Policy Autonomy, 1980 95 106 19. French Government Spending, 1981 95 108
xii Figures 20. The Socialists New Left Policy Mix 110 21. The Conservatives Neoliberal Policy Mix 115 22. British Exchange Rate Variability, 1982 96 118 23. 1997 Decisions concerning the EMU 133
Acknowledgments I would like to thank three different research communities for the valuable contributions that they provided to the research presented in this book. Because the very rst version of this research project took the form of my doctoral dissertation at Ohio State University, I begin by offering my thanks to Ed Mans eld, David Rowe, Tim Frye, and Eric Fisher for helping me get started on the project and for then keeping me on track. I also thank a fellow student in the eld of international political economy (IPE) at Ohio State, Pat McDonald, who provided lots of useful comments on the many drafts of my chapters and papers related to monetary policy divergence among advanced industrial democracies. My second round of thanks goes to the research community at the University of Pittsburgh, where I began writing this book as an assistant professor. I am grateful to my colleagues in the Department of Political Science, including David Barker, Chris Bonneau, Chuck Gochman, Michael Goodhart, Mark Hallerberg, Anibal Perez-Linan, Sebastian Saiegh, Dan Thomas, and Tony Walters for substantive and methodological comments or suggestions that found their way into the manuscript. In particular I also thank Nita Rudra, who volunteered to read multiple drafts of the manuscript. Her insightful feedback led me to restructure my arguments in an effort to reach a broader IPE audience. My third research community is the ever-expanding set of scholars devoted to international and comparative monetary politics. For instructive comments on these topics, as well as for setting professional examples that I have deliberately tried to imitate, I thank Bill Bernhard, Lawrence Broz, Bill Clark, Mark Hallerberg, and Jerry Cohen. I also offer sincere thanks to Jonathan Kirshner and Eric Helleiner, who organized a workshop devoted to the manuscript for this book in November 2005 at Cornell University. I feel honored that so many
xiv Acknowledgments prominent scholars, including Phil Cerny, Kate McNamara, Layna Mosley, Lou Pauly, Chris Way, and Michael Webb, attended and offered their criticism and suggestions for improving the manuscript. I have not been able to follow all of their advice, but I hope that this book is much improved as a result of trying. Finally, I offer my genuine thanks to two anonymous reviewers for their helpful and encouraging comments about this book s manuscript and to Jim Reische, who shepherded me through the peer review process for the University of Michigan Press. I am honored to be associated with the series Michigan Studies in International Political Economy, which has published some great books on the topic of monetary politics. Deborah Patton built the index for this book, and her work was supported by a grant from the Richard D. and Mary Jane Edwards Endowed Publication Fund at the University of Pittsburgh.