Democratic institutions and exchange-rate commitments

From the end of World War II until 1971, exchange-rate practices were governed by the Bretton Woods system (or the dollar standard)—an international regime of fixed exchange rates with the U.S. dollar serving as the anchor currency. The system oper­ ated smoothly through the 1950s, but strains appeared in the 1960s, reflecting a combination of the gold overhang and lax U.S. macroeconomic policies. In 1971 the Nixon administration slammed the gold window shut, effectively ending the Bretton Woods system. Since the early 1970s, countries have been able to choose a variety of exchange-rate regimes ranging from a freely floating exchange rate to one that is rigidly fixed to that of another country. We examine the exchange-rate arrangements adopted by the industrial democracies since 1974. We focus on domestic political institutions to explain a government’s choice among three main exchange-rate op­ tions: A floating exchange rate, a unilateral peg, and a multilateral exchange-rate regime (specifically, the Snake and the European Monetary System).