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Real Exchange Rate Cycles Around Elections

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  • Ernesto H. Stein
  • Jorge M. Streb
  • Piero Ghezzi

Abstract

We develop the implications of devaluation cycles for real exchange rates in a two-sector small open economy with a cash-in-advance constraint. Policy-makers are office-motivated politicians. Voters have incomplete information on the competence and the opportunism of incumbents. Devaluation acts like a tax, and is politically costly because it can signal the government is incompetent. This provides incumbents an incentive to postpone devaluations, and can lead to an overvalued exchange rate before elections. We compare the implied cycle of appreciated/depreciated exchange rates with empirical evidence around elections from Latin America. Copyright Blackwell Publishing Ltd 2005.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Economics & Politics.

Volume (Year): 17 (2005)
Issue (Month): 3 (November)
Pages: 297-330

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Handle: RePEc:bla:ecopol:v:17:y:2005:i:3:p:297-330

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References

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  1. Marco Bonomo & Cristina Terra, 1999. "The Political Economy of Exchange Rate Policy in Brazil: 1964-1997," Research Department Publications 3065, Inter-American Development Bank, Research Department.
  2. Kenneth Rogoff, 1990. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
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  6. Persson, Torsten & Tabellini , Guido, 1997. "Political Economics and Macroeconomic Policy," Seminar Papers 630, Stockholm University, Institute for International Economic Studies.
  7. Marco Bonomo & Cristina Terra, 2004. "Elections and Exchange Rate Policy Cycles," International Finance 0402001, EconWPA.
  8. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  9. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," CEMA Working Papers: Serie Documentos de Trabajo. 140, Universidad del CEMA.
  10. Edwards, Sebastian, 1994. "The Political Economy of Inflation and Stabilization in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 42(2), pages 235-66, January.
  11. Ernesto H. Stein & Jorge M. Streb, 1997. "Political Stabilization Cycles in High Inflation Economies," CEMA Working Papers: Serie Documentos de Trabajo. 123, Universidad del CEMA.
  12. Ilan Goldfajn & Rodrigo O. ValdŽs, 1999. "The Aftermath Of Appreciations," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 229-262, February.
  13. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510944.
  14. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
  15. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
  16. Lindbeck, Assar, 1976. "Stabilization Policy in Open Economies with Endogenous Politicians," American Economic Review, American Economic Association, vol. 66(2), pages 1-19, May.
  17. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
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  19. Nicolini, Juan Pablo, 1998. "More on the time consistency of monetary policy," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 333-350, April.
  20. Ernesto H. Stein & Jeffry Frieden, 2000. "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," Research Department Publications 3118, Inter-American Development Bank, Research Department.
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Citations

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Cited by:
  1. Cermeño, Rodolfo & Grier, Robin & Grier, Kevin, 2010. "Elections, exchange rates and reform in Latin America," Journal of Development Economics, Elsevier, vol. 92(2), pages 166-174, July.
  2. Marco Bonomo & Cristina Terra, 2008. "Political Business Cycles through Lobbying," THEMA Working Papers 2008-18, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  3. Marco Bonomo & Cristina Terra, 2005. "Elections And Exchange Rate Policy Cycles," Economics and Politics, Wiley Blackwell, vol. 17, pages 151-176, 07.
  4. Joel Sebastián Schneider, 2004. "El rol de los gobernadores opositores en las elecciones presidenciales," CEMA Working Papers: Serie Documentos de Trabajo. 281, Universidad del CEMA.
  5. Bonomo, Marco Antônio Cesar & Terra, Maria Cristina T., 2005. "Special Interests and Political Business Cycles," Economics Working Papers (Ensaios Economicos da EPGE) 597, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  6. Kevin B. Grier & Fausto Hernández-Trillo, 2004. "The real exchange rate process and its real effects: The cases of Mexico and the USA," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 1-25, May.
  7. Vladimir Klyuev, 2003. "The Distributional Consequences of Real Exchange Rate Adjustment," IMF Working Papers 03/133, International Monetary Fund.
  8. Diego Aboal & Fernando Lorenzo & Andrés Rius, 2000. "Is the exchange rate politically manipulated around elections? The evidence from Uruguay," Documentos de Trabajo (working papers) 1800, Department of Economics - dECON.
  9. Ari Aisen, 2004. "Money-Based Versus Exchange-Rate-Based Stabilization: Is There Space for Political Opportunism?," IMF Working Papers 04/94, International Monetary Fund.
  10. Sebastián Nieto Parra & Javier Santiso, 2008. "Wall Street and Elections in Latin American Emerging Economies," OECD Development Centre Working Papers 272, OECD Publishing.

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