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Real Exchange Rate Cycles Around Elections

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Author Info
Ernesto H. Stein
Jorge M. Streb
Piero Ghezzi

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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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.0954-1985.2005.00155.x
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Publisher Info
Article provided by Blackwell Publishing 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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Torsten Persson & Guido Tabellini, 1997. "Political Economics and Macroeconomic Policy," NBER Working Papers 6329, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Ilan Goldfajn & Rodrigo O. ValdŽs, 1999. "The Aftermath Of Appreciations," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 229-262, February. [Downloadable!] (restricted)
  4. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," NBER Working Papers 1838, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Kenneth Rogoff, 1990. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Blackwell Publishing, vol. 42(2), pages 169-90, April. [Downloadable!] (restricted)
  8. Nicolini, Juan Pablo, 1998. "More on the time consistency of monetary policy," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 333-350, April. [Downloadable!] (restricted)
  9. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
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  11. Laura Alfaro, 1999. "Why governments implement Temporary Stabilization Programs," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 211-245, November. [Downloadable!]
  12. 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.
  13. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," CEMA Working Papers: Serie Documentos de Trabajo. 140, Universidad del CEMA. [Downloadable!]
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  14. Ernesto H. Stein & Jeffry Frieden, 2000. "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," RES Working Papers 3118, Inter-American Development Bank, Research Department. [Downloadable!]
  15. Marco Bonomo & Cristina Terra, 2005. "Elections And Exchange Rate Policy Cycles," Economics and Politics, Blackwell Publishing, vol. 17, pages 151-176, 07. [Downloadable!] (restricted)
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  16. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December. [Downloadable!] (restricted)
  18. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January. [Downloadable!] (restricted)
  19. Stein, Ernesto H. & Streb, Jorge M., 1998. "Political stabilization cycles in high-inflation economies," Journal of Development Economics, Elsevier, vol. 56(1), pages 159-180, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bonomo, Marco Antônio Cesar & Terra, Maria Cristina T., 2005. "Special Interests and Political Business Cycles," Economics Working Papers (Ensaios Economicos da EPGE) 597, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  2. Bonomo, Marco Antônio Cesar & Terra, Maria Cristina T., 2001. "Elections and Exchange Rate Policy Cycles," Economics Working Papers (Ensaios Economicos da EPGE) 435, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
    Other versions:
  3. Vladimir Klyuev, 2003. "The Distributional Consequences of Real Exchange Rate Adjustment," IMF Working Papers 03/133, International Monetary Fund. [Downloadable!]
  4. Ari Aisen, 2004. "Money-Based Versus Exchange-Rate-Based Stabilization: Is There Space for Political Opportunism?," IMF Working Papers 04/94, International Monetary Fund. [Downloadable!]
  5. 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. [Downloadable!]
  6. 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. [Downloadable!]
  7. 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. [Downloadable!]
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