There are only a limited set of circumstances when advocates of undervaluation
are likely to prevail politically. Since agricultural exporters strongly advocate
undervalued currencies, the probability of undervaluation is greatest when this sector is
politically influential. However, logrolling results in a large coalition favoring
overvaluation, agricultural exporters are unlikely to succeed politically when logrolling
occurs. I argue that logrolling will not take place when there are few veto points in the
political system. With few veto points, policy promises lack credibility, and the pro-
overvaluation coalition will become internally divided. Agriculture is most likely to
succeed politically when there are few veto points. The sectoral logrolling theory
predicts that undervaluation is most likely when two factors coincide: agricultural
exporters are politically influential and there are few veto points. I also hypothesize that
the number of veto points, by encouraging logrolling, increases the likelihood that a fixed
exchange rate will become overvalued.
After introducing the data set that I will use to test the theory, the empirical results
are presented. The data support the hypotheses generated by the sectoral logrolling
theory. The final sections discuss the merits of the sectoral logrolling theory, and some
broader implications of this research.
I. Understanding Currency Valuation
The nominal exchange rate is the number of units of domestic currency required
to purchase one unit of foreign currency. Here we are primarily concerned with the real
exchange rate, which incorporates both the nominal exchange rate and differences in
prices across countries. Overvaluation refers to situations where the real exchange rate is
4
Convention