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Political Stabilization Cycles in High Inflation Economies

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Author Info
Ernesto H. Stein
Jorge M. Streb

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Abstract

High inflation economies often exhibit stop-go cycles of inflation, rather than smooth inflationary processes. This paper relates these stop-go episodes of inflation to a political cycle: the government can try to repress inflation until after the elections in order to increase the chances of being reelected. This is modeled as a two-period game of incomplete information where voters try to pick the most competent government, and inflation (which signals lack of competency) can be lowered by the government in the short run through foreign debt accumulation. Several stabilization episodes, such as the Primavera Plan in Argentina and the Cruzado Plan in Brazil, are used to motivate the model.

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Publisher Info
Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 123.

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Date of creation: Oct 1997
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Handle: RePEc:cem:doctra:123

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Related research
Keywords: Inflation cycles; elections; political economy.;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior

Cited by:
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  1. Frankel, Jeffrey, 2003. "Experience of and Lessons from Exchange Rate Regimes in Emerging Economies," Working Paper Series rwp03-011, Harvard University, John F. Kennedy School of Government. [Downloadable!]
    Other versions:
  2. Pierre-Guillaume Méon & Jean-Marc Rizzo, 2002. "The Viability of Fixed Exchange Rate Commitments: Does Politics Matter? A Theoretical and Empirical Investigation," Open Economies Review, Springer, vol. 13(2), pages 111-132, April. [Downloadable!] (restricted)
  3. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Frankel, Jeffrey, 2005. "Contractionary Currency Crashes In Developing Countries," Working Paper Series rwp05-017, Harvard University, John F. Kennedy School of Government. [Downloadable!]
    Other versions:
  5. 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:
  6. Vítor Castro & Francisco José Veiga, 2002. "Political Business Cycles and Inflation Stabilization," NIPE Working Papers 9/2002, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
  7. Serven, Luis & Frankel, Jeffrey & Fajnzylber, Eduardo & Schmukler, Sergio, 2000. "Verifying exchange rate regimes," Policy Research Working Paper Series 2397, The World Bank. [Downloadable!]
    Other versions:
  8. 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!]
  9. Ernesto H. Stein & Jeffry Frieden & Piero Ghezzi, 2000. "Politics and Exchange Rates: A Cross-Country Approach to Latin America," RES Working Papers 3119, Inter-American Development Bank, Research Department. [Downloadable!]
  10. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," RES Working Papers 4164, Inter-American Development Bank, Research Department. [Downloadable!]
    Other versions:
  11. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Piero Ghezzi & Ernesto Stein & Jorge M. Streb, 2000. "Real exchange rate cycles around elections," CEMA Working Papers: Serie Documentos de Trabajo. 174, Universidad del CEMA. [Downloadable!]
    Other versions:
  13. Juan C. Jaramillo & Roberto Steiner & Natalia Salazar, 1999. "The Political Economy of Exchange Rate Policy in Colombia," RES Working Papers 3064, Inter-American Development Bank, Research Department. [Downloadable!]
  14. 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!]
  15. Ernesto H. Stein & Jorge M. Streb, 1999. "Las elecciones y el momento de las devaluaciones," RES Working Papers 4165, Inter-American Development Bank, Research Department. [Downloadable!]
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