ABSTRACT
Our focus on the international monetary system in the last two chap-ters hinted at but did not deeply explore an important question-what determines the specific exchange-rate policies that governments adopt? Why do some governments fix their exchange rate while others float? Why do some governments prefer strong, and maybe even overvalued currencies, whereas others prefer weak and undervalued currencies? We take up this question in this chapter and the next by examining two approaches to monetary and exchange-rate politics rooted in domestic politics. This chapter develops a society-centered approach. The society-centered approach argues that governments’ monetary and exchange-rate policies are shaped by politicians’ responses to interest-group demands. The European Union (EU)’s willingness to fix exchange rates reflects EU governments’ responses to the demands of domestic interest groups. The American reluctance to fix the dollar, or even to do much to stabilize it, reflects American policymakers’ responses to the demands of American interest groups.
