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

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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 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. 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 In addition, the timing of the election and the probability of Trump being elected affected how markets interpret tweets. Currency traders not only weighed the severity of Trump's proposed policies, but also his electoral prospects, which formed a proxy for the probability that Trump's policies would be implemented. In some parts of the election cycle, Hillary Clinton was assumed to have essentially won the election, and in other times Trump had a reasonable chance of capturing the presidency. His invective became a more serious threat to the Mexican economy when there was an increased risk of him using the power of the presidency to implement an anti-Mexico agenda. If Trump had a small chance of winning the presidency, then the tweet should have a smaller impact. If Trump had a larger chance of winning—or indeed, once he secured the presidency—the tweet can be treated as likely to be put forth as policy. In summary, the peso will be weakest when Trump has a higher probability of winning, strongest when he has a lower chance of winning, given that there is a greater expected chance that he will implement his policies.

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. A second explanation is that financial markets began to discount Trump's tweets as no longer providing useful information. As Ioan Grillo notes in an interview with Mexican residents, “while Mr. Trump's language angers [Mexicans], his first year in power did not affect them as much as they feared.” 30 Actual trade restrictions against Mexico proved to less significant than feared. A third potential explanation is that the period after the inauguration simply represented a regression to the mean. 31 In this case, markets returned to the long-term valuation for the dollar-peso exchange rate after the inauguration. Since the force on the peso was overwhelmingly negative before the inauguration, a return to the mean would represent a slightly positive outcome, as observed in the models. Alexander Slaski, Ph.D., is a postdoctoral fellow at Leiden University. His research focuses on the political economy of foreign direct investment, investment incentives, and currency flows in the developing world, particularly Latin America. His current book project examines how multinational firms shape regulatory policy in developing economies. His work has been published or is forthcoming in outlets including The Review of International Organizations, The Review of International Political Economy, and International Studies Quarterly. Notes Tweets after Trump announces his presidential run, but before being selected as the nominee (47 tweets).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. 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. Currency Politics: The Political Economy of Exchange Rate Policy. Jeffry A. Frieden. Princeton University Press. 2016. Jeffry A. Frieden, Professor of Government at Harvard University, has written a fine book on the determinants of decision-making regarding exchange-rate regime and, to some extent, exchange-rate level within the selected regime. 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 Officer, EH.net. Jeffry A. Frieden, Currency Politics: The Political Economy of Exchange Rate Policy (Princeton: Princeton University Press, 2015).

Currency Politics: The Eurozone Crisis and the World's Financial Future,” the Alice Gorlin Memorial Lecture, Oakland University, April 8, 2015. [If your Flash plugins are not up to date, there is a lower res. version available here.] This figure shows the effect of the 2016 election on the Mexico peso. The event analysis around the 2016 election shows a strong effect, with the peso weakening more than 5 percent. However, the effect seems to become smaller as the size of the window increases, perhaps as investors correct overreaction to the initial news. Note that the figure presents net change in the peso/dollar exchange rate. As the peso exchange rate increased from under 19 pesos/USD to more than 20 pesos/USD, this is equivalent to a more than 5 percent change. A deep ex­amination of the theoretical and political foundations of money that rescues the money discus­sion from economists."—Pratap Bhanu Mehta, Open Magazine 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 the wake of the 2008 financial crisis, critical attention has shifted from the economy to the most fundamental feature of all market economies—money. Yet despite the centrality of political struggles over money, it remains difficult to articulate its democratic possibilities and limits. The Currency of Politics takes readers from ancient Greece to today to provide an intellectual history of money, drawing on the insights of key political philosophers to show how money is not just a medium of exchange but also a central institution of political rule.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. ... The appeal of this text to economists and political scientists alike is obvious; however, it also explains monetary economics with such clarity that it is unusually accessible – at least for the field of economics – to a more general audience. Think of it as occupying the middle ground between pop economics titles, like Freakonomics, and more formidable volumes, such as Thomas Piketty’s Capital in the Twenty-First Century.

Eich’s work is sure to be a landmark in political science. His argument is bold and ambitious; his writing clear and engaging; and his message timely, persuasive and imperative."—Erik Jones, Survival

Professor of Government

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H3: An increased probability of Trump being elected will lead to a decrease in the value of the peso. Empirical Approach 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.The field of currency policy is increasingly important as the global economy becomes ever more integrated; however, it is poorly understood by the general public and often forgotten until a crisis arises. The influence of contingent political factors on the ability of governments to change their monetary policy is shown to be profound. Frieden makes his research accessible to a broader audience through Currency Politics; it is a challenging read in parts, but worth the effort to understand how national politics shape currency policy and the possible future of international currency regimes. A very good book. . . . Eich takes us on a fascinating journey."—Paul Sagar, Perspectives on Politics