Social Preferences, Youth Cohorts and the Real Exchange Rate

• In Event: The Common Coin and the Public Voice: Economic Preferences and Policies

Abstract

How do we explain under- and over-valuation of the real exchange rate? As in other areas of IPE, explanations have followed different fundamental conceptions of the political process, with analyses focusing either on narrow but mobilized interest groups or on the preferences of broad social groups. Recent reviews highlight that the real exchange rate has broad distributional effects. Because these effects spread so widely, we suspect that the real exchange rate is broadly relevant, and that mass, social preferences could affect this policy lever. The problem, however, has been to identify when the interests of consumers or producers will be more salient for the public at large. This paper addresses this identification problem using the leverage provided by demographic factors. In the analysis below, I explore the influence of demography – specifically the relative size of the youth cohort. In what follows, I first explain why a large youth cohort should be associated with pressures for real devaluation and I update earlier estimates of youth preferences over macro-economic outcomes. Next, I test a hypothesis relating the real exchange rate to the size of the youth cohort in a large panel of countries. I report findings consistent with the hypothesis and discuss their relevance for our understanding of the domestic political determinants of the real exchange rate, particularly for the emerging market economies that are still developing domestic mechanisms for economic stabilization and social insurance.

Author

• Lucy M. Goodhart, Brandeis University