Structural Power and the Politics of International Monetary Relations

By Kaelberer, Matthias | The Journal of Social, Political, and Economic Studies, Fall 2005 | Go to article overview

Structural Power and the Politics of International Monetary Relations


Kaelberer, Matthias, The Journal of Social, Political, and Economic Studies


What are the sources of monetary power and how does the concept of monetary power explain the politics of international monetary relations? This paper argues that international monetary power rests on the differential domestic costs of macroeconomic adjustment obligations between weak and strong currency countries. At their very core, exchange rate relations reflect questions of how to distribute the burden of adjustment. Monetary interdependence implies that countries need to establish consistency between internal macroeconomic policy and external exchange rate policy. Countries solve the consistency issue on the basis of market power. Strong monetary players have greater bargaining leverage in monetary negotiations because they do not face a reserve constraint. They can use their leverage to protect their own domestic macroeconomic priorities and to compromise merely on questions of external adjustment and financing. The paper evaluates these analytical assumptions by comparing two European exchange rate regimes (the snake and the European Monetary System), the Bretton Woods system of 1944 to 1971 and the current monetary relations between the United States and China (often referred to as Bretton Woods II).

Key Words: Monetary power; macroeconomic adjustment; Bretton Woods System; European Monetary System; Renminbi-dollar peg.

The absence of power considerations in the contemporary literature on monetary politics is rather striking. Scholars have for the most part devoted attention to domestic factors such as central bank independence, attributes of political institutional structure or policy ideas.2 While these studies yield important insights into monetary politics, this literature has overlooked an important implication of the domestic monetary sphere. Domestic monetary politics is the basis for international monetary power. I argue in this article that monetary power results from differential macroeconomic adjustment obligations of weak and strong monetary countries. Strong monetary players are in a position to choose more freely among their various adjustment options, whereas weak monetary players are constrained in their adjustment options. The differential adjustment situations translate into monetary power and the ability to shape international monetary politics. At its very core, international monetary politics is about how to distribute the burden of adjustment. Monetary regimes - whether they are fixed or pegged exchange rate systems or whether they are a floating system -allocate adjustment obligations either de jure through explicit rules, or de facto because some areas of adjustment remain uncodified.

The paper develops two broader conceptual claims. First, I argue that there is a distinct structural logic to monetary interaction. Exchange rates, by their very nature, are expressions of interdependence. Simply speaking, an exchange rate represents the price of one currency in terms of another currency. Because exchange rates constitute the point of convergence between domestic policy autonomy and the exogenous international environment, monetary regimes specify the mechanisms by which participants establish equilibrium between their own domestic macroeconomic policy and that of their external environment. In other words, governments need to establish consistency among their policies. For the purpose of this article, I call this the "consistency problem."

My second conceptual claim deals with the solution that countries devise for the consistency problem. In theory, governments have two options to establish consistency. They can do so either through internal adjustment (change in macroeconomic policy) or external adjustment (exchange rate change). A third instrument that is relevant in this context, but that does not constitute real adjustment, is the potential to delay or soften real adjustment through the financing of the disequilibrium. I argue that countries solve the consistency problem on the basis of market power. …

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