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Why are realignments postponed? A model of exchange rate revisions with opportunistic governments

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  • Pierre-Guillaume MÈon

Abstract

In this paper we investigate the consequences of elections on the willingness of office-motivated governments to defend a pre-announced parity in the presence of output shocks in a fixed exchange rate regime with an escape clause. Knowing that voters rationally interpret realignments as a sign of incompetence, incumbents refrain from realigning before elections. They can do so either when they are competent or when shocks are small enough. Realignments are therefore more likely and output is less volatile on the morrow than on the eve of elections. The welfare impact of elections is ambiguous. Copyright Blackwell Publishing Ltd and The Victoria University of Manchester, 2004.

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 72 (2004)
Issue (Month): 3 (06)
Pages: 298-316

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Handle: RePEc:bla:manchs:v:72:y:2004:i:3:p:298-316

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  1. Leonardo Bartolini & Allan Drazen, 1996. "When liberal policies reflect external shocks, what do we learn?," Staff Reports 18, Federal Reserve Bank of New York.
  2. Christian B. Mulder & Matthieu Bussière, 1999. "Political Instability and Economic Vulnerability," IMF Working Papers 99/46, International Monetary Fund.
  3. Ernesto Stein and Jorge Streb., 1994. "Political Stabilization Cycles in High Inflation Economies," Center for International and Development Economics Research (CIDER) Working Papers C94-039, University of California at Berkeley.
  4. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc.
  5. James Forder, 2001. "The Theory of Credibility and the Reputation-bias of Policy," Review of Political Economy, Taylor & Francis Journals, vol. 13(1), pages 5-25.
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Cited by:
  1. Dreher, Axel & Walter, Stefanie, 2010. "Does the IMF Help or Hurt? The Effect of IMF Programs on the Likelihood and Outcome of Currency Crises," World Development, Elsevier, vol. 38(1), pages 1-18, January.
  2. 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.

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