Publications by Author: Broz, J. Lawrence

The analysis of the political economy of currency policy has focused on two sets of questions. The first is global, and has to do with the character of the international monetary system. The second is national, and has to do with the policy of particular governments towards their exchange rates. These two interact. National policies, especially of large countries, have an impact on the international monetary system. By the same token, the global monetary regime influences national policy choice. For ease of analysis, however, it is useful to separate analyses of the character of the international monetary system from analyses of the policy choices of national governments.

In the 1990s, the American Executive organized financial rescues of Mexico and several Asian economies. These rescues ("bailouts" to detractors) were controversial in Congress, where members voted repeatedly on legislation to reduce or eliminate the Executive's freedom to engage in them. I analyze voting on bailouts in the House of Representatives between 1995 and 1999 with an eye toward explaining who opposes and who supports bailouts. I argue that the relative income effects of global economic integration influence congressional positions on international bailouts. A key finding, which follows from Stolper–Samuelson reasoning, is that a House member is significantly more likely to oppose the Executive's pro–bailout agenda as the proportion of low–skilled workers in a district increases. Results suggest that the recent globalization backlash extends to international financial policy, which is not surprising since the same economic forces generating losers by way of trade and immigration operate with respect to capital flows.

To discern the public and private motivations behind the establishment and continuance of the Bank of England, we analyze the timing of legislation that renewed the Bank’s charter. The Bank’s original 1694 charter specified a life of only eleven years; at the end of that time, the government could exercise an option to repay its loan to the Bank and dissolve the charter. In fact, the government did not exercise the option, and the Bank’s charter was periodically renewed. We argue that the rechartering process reflected the needs of the government to respond to unforeseen contingencies. The government initiated new charters when budgetary circumstances–shaped largely by wars–required new loans, and when the monopoly value of the Bank’s charter rose. The Bank gained from renegotiating its contract with the government when it faced new and unforeseen competition.

Prevailing approaches to the politics of monetary policy in the United States are based on closed economy assumptions, which is appropriate for analyzing the period before about 1980. However, the opening of U.S. and foreign financial markets since the early 1980s has had a profound effect on domestic monetary policy and domestic monetary politics. The major policy effect is that the transmission channels of monetary policy now include the exchange rate. The major political effect is that the exchange rate has become a focus of concern for well–organized industries in the traded goods sector and, by extension, for Congress. This paper presents statistical evidence showing that the forces driving congressional activity on monetary policy have changed dramatically with the international financial integration of the U.S. economy. Exchange rates, as opposed to interest rates, now largely determine congressional attentiveness to monetary policy and the Federal Reserve.

National governments pursue international monetary policies for domestic political reasons having to do with the policy preferences of important social groups and coalitions. The policies of major states, however, influence the international monetary system. The existence of such externalities – which may be positive as well as negative – suggests that a stable international monetary order need not require implicit or explicit agreement among member states about the characteristics and requirements of membership. Nor is it necessary that such an order be "hegemonic." While stability does seem to require the existence of the equilibrating functions identified by Kindleberger, member states can have different objectives and divergent policy preferences if the international externalities of their national policy choices are strongly positive. Historical evidence from the classical gold standard (and more briefly, fromthe Bretton Woods system and the European Monetary System) is evaluated.

How do very large groups of self–interested and free–riding individuals arrive at cooperative outcomes and establish institutional public goods that govern their behavior? The argument of this paper is that a broad and heterogeneous group of individuals who share interests in certain public goods may, paradoxically, benefit from the rent–seeking activities of a narrow segment of the society. The logic is that legalized monopoly privileges are worthless in the absence of a functioning market, and a functioning market requires mechanisms to protect individual rights to property. Since property rights must exist before a predatory group can benefit from government–imposed exemptions from market forces, there is a self–interested rationale for rent–seekers to organize and lobby for stable property rights. Paradoxically, property rights that benefit an entire community may arise as a function of the predatory actions of a few who seek to establish market forces only to get the government to limit them in their favor. The theory is applied to the origins and early evolution of central banking in England and the United States.