It Takes Two to Float: the Two-Level Politics of Exchange Rate Policy.

Exchange rate policy cannot be modeled as a simple product of domestic politics, as Jeff Frieden does in his recent work on this topic. Countries deciding whether or not to go on or off the gold standard may have been able to make these decisions separately based on domestic politics, without coordination or bargaining, and small countries may still be able to do so with regard to the dollar or euro in today's monetary regime. But big countries, including the United States, cannot make exchange rate policy on their own. It takes two to float, by which I mean that it is more accurate to model exchange rate policy as a two-level game in which two partners each seek an exchange rate regime and level that reflects domestic political interests and institutions, with the outcome determined by bargaining. The United States cannot make a decision to float vis-a-vis the renminbi without China going along. Japan has learned that it cannot devalue the yen without the United States blessing this policy. The paper lays out the two-level logic of exchange rate bargaining and illustrates it by examining several cases of United States - Asia exchange rate bargaining, including US-Japan since 1980 and US-China since 2000. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]