Hedging all Bets: Firm Size, Industry Concentration, and Exchange Rate Politics

• In Event: Contemporary Developments in Monetary Politics

Abstract

Internationally active firms often press governments for monetary policies which reflect their commercial priorities. Much recent work on monetary politics has adopted firm-level perspectives, revealing that preferences over the level and stability of exchange rates vary within industries. I emphasize firm size and resulting industry concentration ratios as important predictors of exchange rate preferences. Large firms now have more financial and operational hedging mechanisms at their disposal, which allow them to absorb currency fluctuations. Small firms are affected to a greater extent by exchange rate movements. In contrast to firm-level analysis of trade politics, large firms across sectors are now less likely to have strong opinions regarding the level of the exchange rate, while small firms routinely encounter collective action problems. Industry concentration ratios therefore impact whether exchange rate preferences are strong and likely to lead to policy change. I test the relationships among firm size, industry concentration, and exchange rate preferences using the World Business Environment Surveys, incorporating various firm- and country-level attributes in multilevel models. I also include case studies of industry concentration and resulting sector-level lobbying patterns in Spain during the euro crisis and in Switzerland during the more recent abandonment of the euro-franc peg. These episodes further support industry concentration as an important predictor of exchange rate preferences in an era of financial and operational hedging.

Author

• Patrick Egan, Tulane University