Democratic Institutions and Exchange-rate Commitments William Bernhard and David Leblang 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). The choice of exchange-rate arrangement,although often shrouded in highly tech- nical language,has relatively predictable consequences for an economy.A fixed (pegged)exchange rate helps to stabilize the external trading environment by decreas- ing uncertainty surrounding the exchange rate and by reducing transaction costs across countries.Additionally,a fixed rate can provide a nominal anchor to macroeconomic policy.On the other hand,adherence to a fixed exchange rate implies a loss of domes- tic monetary policy autonomy.!Without the ability to use monetary policy to counter localized economic shocks,countries may suffer unnecessary welfare losses in out- put or employment. Commitment to a fixed exchange rate also has implications for domestic political competition.A fixed exchange rate might stabilize the environment for trade or help achieve certain macroeconomic policy goals,but it limits politicians'discretion over monetary policy.Under a fixed exchange rate,politicians in the governing parties lose the ability to manipulate monetary policy for electoral or partisan reasons.The 1.Mundell 1961 International Organization 53,1,Winter 1999,pp.71-97 1999 by The IO Foundation and the Massachusetts Institute of TechnologyDemocratic Institutions and Exchange-rate Commitments William Bernhard and David Leblang From the end of World War I1 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). The choice of exchange-rate arrangement, although often shrouded in highly tech￾nical language, has relatively predictable consequences for an economy. A fixed (pegged) exchange rate helps to stabilize the external trading environment by decreas￾ing uncertainty surrounding the exchange rate and by reducing transaction costs across countries. Additionally, a fixed rate can provide a nominal anchor to macroeconomic policy. On the other hand, adherence to a fixed exchange rate implies a loss of domes￾tic monetary policy autonomy.' Without the ability to use monetary policy to counter localized economic shocks, countries may suffer unnecessary welfare losses in out￾put or employment. Commitment to a fixed exchange rate also has implications for domestic political competition. A fixed exchange rate might stabilize the environment for trade or help achieve certain macroeconomic policy goals, but it limits politicians' discretion over monetary policy. Under a fixed exchange rate, politicians in the governing parties lose the ability to manipulate monetary policy for electoral or partisan reasons. The 1. Mundell 1961 International Organization 53, 1, Winter 1999, pp. 71-97 o 1999 by The I0 Foundation and the Massachusetts Institute of Technology