Intense debate surrounds the effects of trade on voting, yet less attention has been paid to how real exchange rate fluctuations may influence elections. A moderately overvalued currency enhances the consumer’s purchasing power. Yet extreme overvaluation threatens exports and economic growth. We therefore expect exchange rates to have a conditional effect on elections: when a currency is undervalued, voters will punish incumbents for further depreciations; when it is highly overvalued, they will potentially reward incumbents for depreciation. In empirical analyses, we explore our argument in three steps. First, we examine up to 412 elections in up to 59 democratic countries and show that voters generally punish depreciations in the real exchange rate when the currency is undervalued. We also find that at extremely high levels of currency overvaluation, voters sometimes reward incumbents for depreciation. A currency peg, especially in the Eurozone, appears to insulate incumbents from these effects. Second, we explore the microfoundations of the election results by conducting survey experiments in three advanced industrialized and two emerging market nations with different monetary and exchange rate policies and institutions, including Australia. Respondents in countries with undervalued to mildly overvalued currencies disapprove of currency depreciations, whereas those facing a very highly overvalued currency favor depreciation. Third, we examine the mechanism of political competition in exchange rate policymaking, and demonstrate that sustained undervaluation is rare in countries with high levels of political competition. Democratic governments have electoral incentives to not maintain undervalued currencies as a means of shielding workers from import competition.

Professor Quinn is the Powers Professor of International Business at the McDonough School of Business, Georgetown University, with a secondary appointment in the Department of Government. Professor Quinn specializes in research in international business, political economy, and public policy. His current research focuses on democratization and economic liberalization in emerging markets, the origins and consequences of international financial liberalization, the impact of trade on U.S. elections, globalization, and international political economy. He teaches undergraduate and graduate courses in business, international affairs, and public policy.