Managing the Exit from Fixed Exchange Rate Regimes: Partisan and Coalitional Explanations for the Divergent Paths of Brazil and Argentina.

What explains Argentina’s and Brazil’s paths out of fixed exchange regimes at the turn of the century? Both countries faced similar imbalances in the late ‘90s. While Argentina adjusted in 2001 by financial crash, Brazil was able to transit more orderly toward a flexible exchange rate regime in 1999. My argument is that successful transitions toward a new set of macroeconomic institutions requires incumbents to craft a political coalition able to control the relevant institutional veto players. The paper explains incumbents’ capacity for crafting these coalitions by focusing on partisan dynamics within federal institutions. Based on the case studies, I challenge the conventional wisdom on the role of nationally integrated parties in overcoming perverse fiscal incentives in federations. In presidential systems with divided government, the fragmentation of the party system may contribute to governance by multiplying the number of potential legislative partners the executive can choose. On the other hand, when the national executive faces only few nationally integrated opposition parties, the costs of coalition building and the probability of legislative deadlock increase. Brazil and Argentina illustrate each one of these patterns. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]