Interest Group Politics over Exchange Rate Valuation in Asian Countries

Abstract

Few empirical researches have analyzed on the role of different interest groups in currency relations. Hence, the purpose of this thesis is to fill the theory gap and address the following question: how the political power of a country's manufacturing sector as well as the intensification of a country's control over its interest rate regime would influence the country's exchange rate decision making. This thesis uses a mixture of methods: two regression models followed by one case study of China. The OLS regression model analyzes the determinants of currency undervaluation through examining a panel dataset of eleven Asian countries from 1974 to 2005, and finds that the manufacturing sector of a country is more likely to favor an undervalued exchange rate if the country adopts intensified interest rate control as a policy tool. The duration model also analyzes eleven Asian countries who initially adopts a fixed exchange rate regime from 1974 to 2005, and finds that for countries with fixed exchange rate regimes, when the country is actively involved in international trade, the larger the manufacturing sector, the longer the fixed exchange rate regime arrangement will endure. Moreover, for countries with fixed exchange rate regimes, the more intensely a country manipulates its interest rates, and the more intensely a country controls its capital flows, the longer the fixed exchange rate regime arrangement will endure. The China case study mainly analyzes China's manufacturing sector and state-owned banks' lobbying power and practice towards exchange rate decision making from 1994 to 2010. The case study describes, in rich detail, the interest group influence over the exchange rate decision-making process in a typical non-democratic context, and proves that in non-democratic regimes, interest groups still have various ways to influence the government's exchange rate decision-making process.