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Sustaining fixed rates: The political economy of currency pegs in Latin America

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Abstract

Government exchange rate regime choice is constrained by both political and economic factors. One political factor is the role of special interests: the larger the tradable sectors exposed to international competition, the less likely is the maintenance of a fixed exchange rate regime. Another political factor is electoral: as an election approaches, the probability of the maintenance of a fixed exchange rate increases. We test these arguments with hazard models to analyze the duration dependence of Latin American exchange rate arrangements from 1960 to 1999. We find substantial empirical evidence for these propositions. Results are robust to the inclusion of a variety of other economic and political variables, to different time and country samples, and to different definitions of regime arrangement. Controlling for economic factors, a one percentage point increase in the size of the manufacturing sector is associated with a reduction of six months in the longevity of a country’s currency peg. An im pending election increases the conditional likelihood of staying on a peg by about 8 percent, while the aftershock of an election conversely increases the conditional probability of going off a peg by 4 percent.

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VIII (2005)
Issue (Month): (November)
Pages: 203-225

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Handle: RePEc:cem:jaecon:v:8:y:2005:n:2:p:203-225

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Keywords: exchange rates; elections;

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  1. Blomberg, S. Brock & Hess, Gregory D., 1997. "Politics and exchange rate forecasts," Journal of International Economics, Elsevier, Elsevier, vol. 43(1-2), pages 189-205, August.
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  13. Marco Bonomo & Cristina Terra, 2004. "Elections and Exchange Rate Policy Cycles," International Finance, EconWPA 0402001, EconWPA.
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As found on the RePEc Biblio, the curated bibliography for Economics:
  1. > Political Economy > The Political Economy of Latin America
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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, Elsevier, vol. 38(1), pages 1-18, January.
  2. Raul Razo-Garcia, 2011. "The Duration of Intermediate Exchange Rate Regimes and Capital Controls," Carleton Economic Papers, Carleton University, Department of Economics 11-01, Carleton University, Department of Economics, revised 17 Oct 2011.
  3. Sebastián Nieto Parra & Javier Santiso, 2008. "Wall Street and Elections in Latin American Emerging Economies," OECD Development Centre Working Papers, OECD Publishing 272, OECD Publishing.
  4. Sébastien Wälti, 2005. "The duration of fixed exchange rate regimes," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp96, IIIS.
  5. Jorge M. Streb, 2011. "Estabilización económica e incentivos políticos," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 461, Universidad del CEMA.
  6. Terra, Maria Cristina T., 2007. "The Political Economy of Exchange Rate in Brazil," Economics Working Papers (Ensaios Economicos da EPGE) 656, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  7. repec:tcd:wpaper:tep8 is not listed on IDEAS
  8. Kato, Isamu & Uctum, Merih, 2008. "Choice of exchange rate regime and currency zones," International Review of Economics & Finance, Elsevier, Elsevier, vol. 17(3), pages 436-456.
  9. Walter, Stefanie, 2008. "A New Approach for Determining Exchange-Rate Level Preferences," International Organization, Cambridge University Press, Cambridge University Press, vol. 62(03), pages 405-438, July.
  10. Ralph Setzer, 2005. "The Political Economy of Fixed Exchange Rates: A Survival Analysis," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim, Department of Economics, University of Hohenheim, Germany 265/2005, Department of Economics, University of Hohenheim, Germany.
  11. Sean Barrett, 2005. "Risk Equalisation and Competition in the Irish Health Insurance Market," Trinity Economics Papers, Trinity College Dublin, Department of Economics 200058, Trinity College Dublin, Department of Economics.
  12. Bodea, Cristina, 2010. "The political economy of fixed exchange rate regimes: The experience of post-communist countries," European Journal of Political Economy, Elsevier, Elsevier, vol. 26(2), pages 248-264, June.
  13. Baldwin, Richard E., 2011. "Sequencing Regionalism: Theory, European Practice, and Lessons for Asia," Working Papers on Regional Economic Integration, Asian Development Bank 80, Asian Development Bank.
  14. Martínez, Juan & Santiso, Javier, 2003. "Financial Markets and Politics: The Confidence Game in Latin American Emerging Economies," MPRA Paper 12909, University Library of Munich, Germany.
  15. Graham Bird & Alex Mandilaras & Helen Popper, 2012. "Explaining Shifts in Exchange Rate Regimes," School of Economics Discussion Papers, School of Economics, University of Surrey 1312, School of Economics, University of Surrey.
  16. Tamgac, Unay, 2013. "Duration of fixed exchange rate regimes in emerging economies," Journal of International Money and Finance, Elsevier, Elsevier, vol. 37(C), pages 439-467.
  17. Fabrizio Carmignani & Emilio Colombo & Patrizio Tirelli, 2005. "Consistency versus credibility: how do countries choose their exchange rate regime?," International Finance, EconWPA 0502001, EconWPA.
  18. Fernández-Albertos, José, 2012. "Exchange rate regime preferences of the international sector. Firm-level evidence," Economics Letters, Elsevier, Elsevier, vol. 116(1), pages 26-30.
  19. Pathak, Parag & Tirole, Jean, 2006. "Speculative Attacks and Risk Management," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 438, Institut d'Économie Industrielle (IDEI), Toulouse.

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