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Money-Based Versus Exchange-Rate-Based Stabilization

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  • Ari Aisen

Abstract

In response to high and chronic inflation, countries have adopted different stabilization policies. However, the extent to which these stabilization programs were designed for political motives is not clear. Since exchange-rate-based stabilizations (ERBS) create an initial consumption boom followed by a contraction, whereas money-based stabilizations (MBS) generate a consumption bust followed by a recovery, policymakers may consider the timing of elections when determining the nominal anchor for stabilization. This paper finds strong evidence that the choice of nominal anchor depends on elections, implying the existence of political opportunism. ERBS are, on average, launched before elections while MBS are set after them.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/94.

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Length: 35
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/94

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Keywords: Stabilization measures; Anti-inflation policy; Economic models; elections; inflation; election; inflation stabilization; chronic inflation; voters; voting; inflation rate; high inflation; monetary aggregate; presidential elections; rational expectations; rate of inflation; congressional elections; percent annual inflation; annual inflation; terms of trade shocks; terms of trade; adaptive expectations; real interest rates; inflation stabilizations; low inflation; voter behavior; money supply; lower inflation; real exchange rates; monetary base; voter; foreign exchange; voting behavior;

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References

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  1. Fair, Ray C, 1978. "The Effect of Economic Events on Votes for President," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 159-73, May.
  2. Kenneth Rogoff, 1987. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
  3. Ernesto H. Stein & Jorge M. Streb, 1997. "Political Stabilization Cycles in High Inflation Economies," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 123, Universidad del CEMA.
  4. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  5. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
  6. Federico Echenique & Alvaro Forteza, 2000. "Are stabilization programs expansionary?," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 15(1), pages 65-89.
  7. Marco Antonio Cesar Bonomo & Maria Cristina Trindade Terra, 1999. "The Political Economy of Exchange Rate Policy in Brazil: an Empirical Assessment," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 53(4), pages 411-432, October.
  8. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank.
  9. repec:fth:repuec:2/97 is not listed on IDEAS
  10. Piero Ghezzi & Ernesto Stein & Jorge M. Streb, 2000. "Real exchange rate cycles around elections," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 174, Universidad del CEMA.
  11. Edwards, Sebastian, 1994. "The Political Economy of Inflation and Stabilization in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 42(2), pages 235-66, January.
  12. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, American Economic Association, vol. 68(2), pages 348-52, May.
  13. A. Javier Hamann, 1999. "Exchange-Rate-Based Stabilization," IMF Working Papers, International Monetary Fund 99/132, International Monetary Fund.
  14. Luisa Lambertini, 2003. "Are Budget Deficits Used Strategically?," Boston College Working Papers in Economics, Boston College Department of Economics 578, Boston College Department of Economics.
  15. Jose Veiga, Francisco, 1999. "What causes the failure of inflation stabilization plans?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(2), pages 169-194, February.
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Cited by:
  1. Irineu De Carvalho Filho & Marcos Chamon, 2008. "A Micro-Empirical Foundation for the Political Economy of Exchange Rate Populism," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 481-510, July.
  2. Jeffry Frieden & David Leblang & Neven Valev, 2010. "The political economy of exchange rate regimes in transition economies," The Review of International Organizations, Springer, Springer, vol. 5(1), pages 1-25, March.
  3. Selim Elekdag, 2006. "How Does the Global Economic Environment Influence the Demand for IMF Resources," IMF Working Papers, International Monetary Fund 06/239, International Monetary Fund.

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