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Broken Promises: Regime Announcements and Exchange Rates around Elections

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  • Pablo Javier Garofalo
  • Jorge M. Streb

Abstract

We study exchange rate dynamics around government changes conditional on the exchange rate regime, which we identify by combining the IMF de jure and the Reinhart and Rogoff de facto exchange rate regime classifications. This allows distinguishing whether the official exchange rate regime announcements match actual policy or are inconsistent with it. Using monthly data from Latin American democracies, we do not find significant exchange rate depreciations before the change of government in any of the regimes we identify. However, we do detect a gradual real exchange rate overvaluation when the de jure regime is fixed but the de facto policy is flexible, which is abruptly corrected after the change of government; this pattern of real exchange rate misalignments when the announcement does not match actual behavior is linked to incumbents that postpone devaluations until the successor steps in. This pattern of broken promises is typical until 1999, but it becomes exceptional thereafter.

Suggested Citation

  • Pablo Javier Garofalo & Jorge M. Streb, 2022. "Broken Promises: Regime Announcements and Exchange Rates around Elections," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 1-32, June.
    • Handle: RePEc:col:000425:020338
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    Cited by:

    1. Emilio Ocampo, 2023. "Dollarization as an Effective Commitment Device: The Case of Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 848, Universidad del CEMA.

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    More about this item

    Keywords

    Exchange rates; exchange rate misalignment; exchange rate regimes; electoral cycles;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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