Endogenous changes in the exchange rate regime: A bureaucratic incentive model

Public choice submits that legal changes can be endogenous in such a way that they are manipulated by bureaucrats who want to maximize rents from transactions with various interest groups. This paper takes the change in exchange rate regimes to empirically examine the premise. It offers a two-stage method, in which we first show that the exchange rate is influenced by interest group pressures, and subsequently that the 1990 market average regime (MAR), as a phase-in policy in Korea, was introduced mainly to serve bureaucratic incentives. This method is expected to be useful to a host of countries for various studies attempting to test a possible existence of bureaucratic or other hidden motivations behind any “isolated'' event of policy change.