Abstract

This article examines the relationship between government popularity and exchange rate movements in Britain since 1987. It argues that: (1) unexpected drops in the government's public support lead to currency depreciations and increased exchange rate volatility, and (2) unanticipated depreciations hurt the government's public support. It estimates separate models of the exchange rate and government voting intention iteratively and recursively. At each iteration, measures of exchange rate and public opinion shocks are generated. These generated variables are employed in the next iteration of estimates, including measures of political shocks in the model of exchange rate behavior and measures of exchange rate movements in the model of voting intention. This enables, therefore, the measurement of both the political costs of currency depreciation and the exchange rate consequences of political competition.