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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. 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.
  2. A. Javier Hamann, 1999. "Exchange-Rate-Based Stabilization," IMF Working Papers 99/132, International Monetary Fund.
  3. 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.
  4. Federico Echenique & Alvaro Forteza, 2000. "Are stabilization programs expansionary?," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 15(1), pages 65-89.
  5. 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.
  6. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
  7. Kenneth Rogoff, 1987. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
  8. Edwards, Sebastian, 1994. "The Political Economy of Inflation and Stabilization in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 42(2), pages 235-66, January.
  9. Jose Veiga, Francisco, 1999. "What causes the failure of inflation stabilization plans?," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 169-194, February.
  10. Luisa Lambertini, 2003. "Are Budget Deficits Used Strategically?," Boston College Working Papers in Economics 578, Boston College Department of Economics.
  11. repec:fth:repuec:2/97 is not listed on IDEAS
  12. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  13. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  14. 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.
  15. Ernesto H. Stein & Jorge M. Streb & Piero Ghezzi, 2005. "Real Exchange Rate Cycles Around Elections," Economics and Politics, Wiley Blackwell, vol. 17(3), pages 297-330, November.
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Cited by:
  1. Selim Elekdag, 2006. "How Does the Global Economic Environment Influence the Demand for IMF Resources," IMF Working Papers 06/239, International Monetary Fund.
  2. Jeffry Frieden & David Leblang & Neven Valev, 2010. "The political economy of exchange rate regimes in transition economies," The Review of International Organizations, Springer, vol. 5(1), pages 1-25, March.
  3. 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.

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