The Currency of Politics: The Political Theory of Money from Aristotle to Keynes

Product Information

While the fragility of exchange rate commitments has been known since the publication of a 1995 paper by Obstfeld and Rogoff, the question of why some central banks fix the value of their currencies and others do not is less well understood. Jeffry Frieden’s Currency Politics provides a thoughtful guide to the political economy of exchange rate policy. ... Currency Politics is an ambitious book on an important topic. Frieden is one of the best political economists and one of the best scholars writing on this subject."—Sebastian Edwards, University of California, Los Angeles and author of Toxic Aid H3: An increased probability of Trump being elected will lead to a decrease in the value of the peso. Empirical Approach Eich’s extraordinary book provides an essential guide to thinking about the politics of money."— Adam Tooze

Thus, tweets signal two kinds of information that affect the Mexican peso: future US policy and the probability that those policies will be implemented, which are mediated by the perceived likelihood of Trump winning the election. On the latter point, the largest move in the peso came after Trump won the election—during which time no additional policy information was released, yet when new information about the probability of Trump being elected changed (from a relatively low probability to 100 percent, in a “surprise” outcome). Este artículo examina los efectos de los impactos electorales extranjeros en los mercados de divisas. Presenta una teoría de la señalización y la incertidumbre para explicar por qué las elecciones en países con vínculos económicos estrechos deberían afectar las tasas de cambio. Metodológicamente, este artículo se centra en varios estudios de caso, con las elecciones de 2016 en Estados Unidos como caso central: se utiliza un marco de análisis de eventos para medir el impacto de las elecciones en el peso mexicano mediante la explotación de la exogeneidad plausible de los tuits de Donald Trump. También se miden los cambios en el peso utilizando la probabilidad prevista de que Trump gane las elecciones para demostrar que el peso es más débil cuando dicho candidato tiene la mayor probabilidad de ganar las elecciones. Además, se incluye una serie de análisis y comprobaciones de solidez de otros casos recientes notables en los que la incertidumbre electoral afectó las monedas de otros países, incluida la elección brasileña de 2018. Los resultados cuantifican el efecto de las elecciones extranjeras sobre los tipos de cambio, con base en la bibliografía existente que se centra en cómo las elecciones nacionales dan forma a los mercados de divisas. A modo de conclusión, se incluye un debate de la validez externa del fenómeno demostrado por los casos en el artículo, trazando futuras investigaciones sobre el tema y delineando formas de extender los hallazgos. Agustín Carstens, the head of Mexico's central bank (Banxico) from 2010 to 2017, was charged with maintaining the stability and purchasing power of the peso. Carstens faced enormous challenges in his role as the head of Mexican monetary policy, not only because of domestic economic and political forces, but also because of elections in the country's northern neighbor. Carstens vividly described the impact of the US election on his ability to exercise domestic monetary policy: expressing frustration over his loss of power over the peso, he called President Trump's election, and the concomitant economic threats against Mexico, a “horror movie” and a “hurricane.” 1 He also said that Trump was able to completely disrupt his plans to stabilize the currency—which cost more than 2 billion dollars in hard reserves—with only two tweets, both focusing on investment by the auto industry in Mexico. 2 Carstens’ direct style of speaking further reveals his awareness of the effects: in comments to the Mexican Senate, he explained that “I'm going to say it like it is, in a very simple way: with two tweets from we know who, the effect faded away,” referring to the impact of his currency interventions relative to the influence of Trump's tweets. 3 Regression analysis of voting data and proxy variables for political interests largely substantiate Frieden’s theories in the selected cases, particularly the preference of manufacturers and exporters for a flexible regime and lower price level. International financial intermediaries, who have historically lobbied for a more stable regime, contest these policy settings. There is also evidence that populist politicians may inflate the price level to boost the purchasing power of consumers, particularly in the Latin American context.

My theory relies on insights from financial economists and the financial markets literature, notably the semi-strong version of the efficient markets hypothesis (EMH). The EMH states that financial markets incorporate all known information about an asset (in this case, currencies) and create a present value based on future expectations of the asset value ( Fama 1970). Thus, a decline in the value of a currency reflects shifting expectations about its value, driven by new information that causes those active in currency markets to expect the future value to be lower. However, markets incorporate information from a variety of global sources, including via foreign elections; there is no reason to think that only domestic drivers should affect currency values. If you are interested in this review, you may also like to listen to a podcast of Professor Frieden’s LSE public lecture, ‘Lessons for the Euro from America’s Past’, recorded on 19 January 2016.

In addition to the event analysis, I simply regress the probability of Trump winning on the Mexican peso. I use Nate Silver's 538 blog (the aggregate “chance of winning” polls-plus measure) for Trump's electoral probability. 16 Nate Silver's probability calculations are a widely used and respected aggregator of available public opinion polls. I also use the Iowa Betting Markets, given that it involves more than simply cheap talk, as bettors have a financial stake in the outcome and thus an incentive to gather accurate information about the electoral probabilities. 17 In Currency Politics, Frieden not only draws together beautifully the strands of his previous work, but he advances a new and entirely persuasive explanation of the euro project as an essential bulwark against competitive devaluations. Above all, he argues convincingly for the centrality of exchange rate policy to domestic politics, international relations, and macroeconomics in open economies." —Ronald Rogowski, University of California, Los Angeles

Get help with access

The restricted dataset contains 80 tweets regarding Mexico. I assume (and confirm via review and hand-coding) that all remaining tweets are negative. I run several different event analyses, including on the time period after which he has announced his run but before the campaign as the Republican candidate (June 16, 2015 to May 3, 2016), the time period in which Trump is the presumed and then official candidate (May 3, 2016 to November 8, 2016), the time between election day and inauguration day (November 8, 2016 to January 20, 2016) and inauguration day to September 2017. The full list of dates and the text of the tweets is in the online appendix. Notably, if several tweets are issued in the same day, I treat them as a single event, and use the average sentiment score for all tweets on that day.

This excellent book is for anyone who has ever wondered about the origins of the Eurozone, the causes of the currency crises, and the importance of the classical gold standard. Frieden combines lively historical narratives with statistical analyses to show that currency politics are pretty much the same across time and space. No other author could bring out the common threads running through the book's cases so clearly." —J. Lawrence Broz, University of San Diego H1: New negative policy information via a tweet from Trump will lead to a decrease in the value of the peso. Identifying the motivations for currency policy preferences on the part of industries seeking to influence politicians, Jeffry Frieden shows how each industry's characteristics—including its exposure to currency risk and the price effects of exchange rate movements—determine those preferences. Frieden evaluates the accuracy of his theoretical arguments in a variety of historical and geographical settings: he looks at the politics of the gold standard, particularly in the United States, and he examines the political economy of European monetary integration. He also analyzes the politics of Latin American currency policy over the past forty years, and focuses on the daunting currency crises that have frequently debilitated Latin American nations, including Mexico, Argentina, and Brazil. In the use of case studies and the inclusion of historical and contextual factors, Currency Politics introduces a meaningful narrative to the analysis. Pure economic analysis is typically deterministic and struggles to account for contingent factors. By considering social, institutional and historical aspects, the text succeeds in treating the economy for what it really is: a complex and interdependent phenomenon.

Currency Politics: The Political Economy of Exchange Rate Policy. Jeffry A. Frieden. Princeton University Press. 2016. Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. Eich’s book is ultimately a call to revive democratic debate about money…this excellent book…does not tell us what to do, but he does show us something can be done."—Geoff Mann, New Statesman

The moment when you start to wonder what money is feels like pitching through a trapdoor into the void. This book is a marvelous aid to stabilizing that awful sense of cognitive vertigo. By examining several periods in the history of money, and showing how it has been used in each period to constitute power and the state, Eich brings us to the present with a much clearer sense of where we are, how we got here, and how we might seize money itself and use it as a creative political force for good.”—Kim Stanley Robinson, author of Ministry for the Future A very good book. . . . Eich takes us on a fascinating journey."—Paul Sagar, Perspectives on Politics The book is readable for both economists and political scientists. I recommend Currency Politics to both sets of scholars. Economists will learn about the political aspects of exchange-regime choice and political scientists about the economic aspects."—Lawrence H. Officer, EH.Net

Professor of Government

As the campaign continued and the information uncertainty about potential policy toward Mexico diminished, one would expect that the effect of tweets on the peso would diminish. However, as Benton et al. note, even when tweets did not contain any new information (indeed, they often contained similar or even identical language to older tweets), they shifted prices in financial markets ( Benton and Philips 2020). That is, even though tweets should no longer have an effect if they did not contain new information, the effect of tweets on the peso continued. The explanation, again drawing on Benton et al., is that the frequency of tweets signaled a commitment to implementing those policies. Indeed, the size of that effect depends on both the frequency of his tweets against Mexico—a proxy for his willingness to target Mexico with harmful economic policies—and the severity of his rhetoric, including whether he mentions new specific proposals that would harm the Mexican economy. Thus, a repeated tweet signals a higher probability that the proposal is likely to be implemented and is not simply noise or “cheap talk.” It’s been a wild week in Westminster and it’s starting to look like the Tories are losing their grip. Ed and George chew over the Supreme Court’s judgment on Rwanda and what it means for Sunak. Could his new Foreign Secretary slam the brakes on some Tories’ hopes to leave the ECHR?