Democratic Institutions and Exchange Rates 73 in this literature vary according to initial assumptions regarding whether the policy- maker's objective function emphasizes price stability or aggregate output.4 We argue that the configuration of domestic political institutions will influence politicians' need to maintain policy flexibility,which,in turn,shapes their preferences over the exchange-rate arrangement. Second,the international political economy literature examines the question of exchange-rate regime choice.The literature has traditionally focused on the presence (or absence)of an international hegemon to explain developments in the interna- tional monetary system.According to this view,a major power is necessary to pro- vide credible backing to the world's currency and act as a lender of last resort.5 Subsequent work examines the classical gold standard,the interwar period,and the Bretton Woods regime.6 Since the breakup of Bretton Woods,however,states have been able to choose from a variety of exchange-rate arrangements.Under this permis- sive international monetary system,an emphasis on hegemonic power cannot ex- plain the specific variation of exchange-rate arrangements across states. More recent literature examines both systemic and domestic determinants of the international monetary behavior of a state.7 Substantively,much of this literature focuses on the development of alternative exchange-rate arrangements in Europe, including the Snake,the European Monetary System (EMS),and the planned transi- tion to a single currency.8 These accounts of European monetary cooperation empha- size the policy goals of insulating European economies from the fluctuations of the U.S.dollar,enhancing intra-EC trade,and controlling inflation by "importing"Ger- many's anti-inflation credibility. Political economists have also developed a variety of domestic-level explanations for macroeconomic policy and exchange-rate choice.One set of explanations fo- cuses on the demanders of exchange-rate policies,including economic sectors or specific interest groups.10 The policy demands of these actors are assumed to reflect their position in the global economy.11 These explanations,however,tend to under- play the role of politicians in the choice of exchange-rate arrangement.Although politicians are responsive to societal interests,they often have incentives and policy preferences independent of societal actors. Political economists have also investigated the relationship between domestic po- litical institutions and exchange-rate decisions.Three types of arguments-based on welfare gains,policymaking capabilities,and credible commitments-potentially link 4.See Aghevli,Khan,and Montiel 1991;and Melvin 1985. 5.Kindleberger 1973. 6.On the gold standard,see Eichengreen 1989;and Gallarotti 1993.On the interwar period,see Eichengreen 1992b;and Simmons 1994.On the Bretton Woods regime,see Eichengreen 1996;Gowa 1983;and Keohane 1984. 7.Cohen 1996. 8.For example,Eichengreen 1992a;Eichengreen and Frieden 1994;Loriaux 1991;Ludlow 1982; McNamara 1995;Oatley 1994;and Sandholtz 1993. 9.See Frieden 1991 and 1994;and Simmons 1994. 10.See Frieden 1991;and Gowa 1983. 11.See Frieden 1991;and Keohane and Milner 1996.Democratic Institutions and Exchange Rates 73 in this literature vary according to initial assumptions regarding whether the policy￾maker's objective function emphasizes price stability or aggregate o~tput.~ We argue that the configuration of domestic political institutions will influence politicians' need to maintain policy flexibility, which, in turn, shapes their preferences over the exchange-rate arrangement. Second, the international political economy literature examines the question of exchange-rate regime choice. The literature has traditionally focused on the presence (or absence) of an international hegemon to explain developments in the interna￾tional monetary system. According to this view, a major power is necessary to pro￾vide credible backing to the world's currency and act as a lender of last re~ort.~ Subsequent work examines th,e classical gold standard, the interwar period, and the Bretton Woods regime.6 Since the breakup of Bretton Woods, however, states have been able to choose from a variety of exchange-rate arrangements. Under this permis￾sive international monetary system, an emphasis on hegemonic power cannot ex￾plain the specific variation of exchange-rate arrangements across states. More recent literature examines both systemic and domestic determinants of the international monetary behavior of a state.' Substantively, much of this literature focuses on the development of alternative exchange-rate arrangements in Europe, including the Snake, the European Monetary System (EMS), and the planned transi￾tion to a single ~urrency.~ These accounts of European monetary cooperation empha￾size the policy goals of insulating European economies from the fluctuations of the U.S. dollar, enhancing intra-EC trade, and controlling inflation by "importing" Ger￾many's anti-inflation credibility. Political economists have also developed a variety of domestic-level explanations for macroeconomic policy and exchange-rate ch~ice.~ One set of explanations fo￾cuses on the demanders of exchange-rate policies, including economic sectors or specific interest groups.1° The policy demands of these actors are assumed to reflect their position in the global economy.ll These explanations, however, tend to under￾play the role of politicians in the choice of exchange-rate arrangement. Although politicians are responsive to societal interests, they often have incentives and policy preferences independent of societal actors. Political economists have also investigated the relationship between domestic po￾litical institutions and exchange-rate decisions. Three types of arguments-based on welfare gains, policymaking capabilities, and credible commitments-potentially link 4. See Aghevli, Khan, and Montiel 1991; and Melvin 1985. 5. Kindleberger 1973. 6. On the gold standard, see Eichengreen 1989; and Gallarotti 1993. On the interwar period, see Eichengreen 1992b; and Simmons 1994. On the Bretton Woods regime, see Eichengreen 1996; Gowa 1983; and Keohane 1984. 7. Cohen 1996. 8. For example, Eichengreen 1992a; Eichengreen and Frieden 1994; Loriaux 1991; Ludlow 1982; McNamara 1995; Oatley 1994; and Sandholtz 1993. 9. See Frieden 1991 and 1994; and Simmons 1994. 10. See Frieden 1991; and Gowa 1983. 11. See Frieden 1991; and Keohane and Milner 1996