A previous version of this paper was presented at the Politics of Preferential Trade Agreements Workshop at Princeton University, April 30–May 1, 2010. For comments on earlier drafts, we thank Bill Clark, Jeff Frieden, Layna Mosley, Thomas Oatley, Peter Rosendorff, David Singer, and participants at workshops at Duke University and the University of Wisconsin—Madison.
Ties that Bind? Preferential Trade Agreements and Exchange Rate Policy Choice†
Article first published online: 30 APR 2013
© 2013 International Studies Association
International Studies Quarterly
Volume 57, Issue 2, pages 385–399, June 2013
How to Cite
2013) Ties that Bind? Preferential Trade Agreements and Exchange Rate Policy Choice. International Studies Quarterly, doi: 10.1111/isqu.12050. (
- Issue published online: 18 JUN 2013
- Article first published online: 30 APR 2013
This paper examines the question of whether a country's exchange rate policy choices are influenced by membership in preferential trade agreements (PTAs). We argue that PTAs, by constraining a government's ability to employ trade protection, increase its incentives to maintain monetary and fiscal autonomy in order to manipulate the domestic political economy. Consequently, we contend that countries are less likely to adopt or sustain a fixed exchange rate when they have signed a PTA with their “base” country—the country to whom they have traditionally fixed the currency or the major industrial country to whom they have the most extensive trade ties. Likewise, countries that have signed a “base” PTA also tend to have more depreciated/undervalued currencies, as measured by the level of the real exchange rate. Using data on 99 countries from 1975 to 2004, we find strong support for these hypotheses. These findings shed light on the complex relationship between different types of macroeconomic policies in the contemporary world economy. More broadly, they speak to the question of whether international agreements are credible commitment mechanisms when close policy substitutes exist at the domestic level.