The end of international pegged exchange rates? How industries influence governments' ability to maintain a political exchange rate regime

Why have stable pegged exchange rate regimes between large, industrialized countries become the exception rather than the rule in today's international economy?; My argument is that governments' ability to maintain a pegged exchange rate regime is dependent on the dominant corporate profitmaking strategies in countries that develop a balance-of-payments deficit. A deficit country can maintain a pegged exchange rate when important domestic industries experience reductions in profits at the time of a balance-of-payments deficit and respond to profit reductions with a new profitmaking strategy that integrates trade restrictions or capital controls. Otherwise, in the face of a continued balance-of-payments deficit, the government will have to withdraw from the pegged rate regime and let its exchange rate float.; Today's lack and instability of pegged exchange rate regimes can, then, be explained with the historical development of corporate profitmaking strategies. Strategies have become increasingly dependent on free trade and free capital mobility. Even in times of profit reductions or losses, comprehensive trade restrictions or capital controls can no be longer applied.; The rationale of the argument is that for political and technical reasons, governments need the support of trade restrictions or capital controls to stabilize a pegged exchange rate in the medium to long-term. At the same time, governments are structurally dependent on industries, but pegged exchange rates are not a prerequisite for industries to function properly. Firms can privately manage the negative side-effect of floating exchange rates--short-term exchange rate volatility--with hedging instruments. That means that once the maintenance of a pegged exchange rate conflicts with industries' other policy needs, industries will forego the pegged exchange rate regime to get their other policy needs met.; This connection between a country's industrial development and its ability to maintain a pegged exchange rate regime is evaluated in three case studies, covering the major efforts to maintain pegged exchange rates: the gold standard, the Bretton Woods regime, and the European exchange rate regimes. All three cases confirm the basic argument.