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Foreign Exchange Intervention and the Political Business Cycle : A Panel Data Analysis

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Author Info
Axel Dreher () (KOF Swiss Economic Institute, ETH Zurich Switzerland and CESifo, Germany)
Roland Vaubel () (University of Mannheim, Dept. of Economics, Mannheim, Germany,)

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Abstract

By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 146 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the preelection index. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique.

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Publisher Info
Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 07-159.

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Length: 28 pages
Date of creation: Apr 2007
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Handle: RePEc:kof:wpskof:07-159

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Related research
Keywords: Foreign exchange interventions; political business cycles;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Alesina, Alberto F & Cohen, Gerald D & Roubini, Nouriel, 1992. "Macroeconomic Policy and Elections in OECD Democracies," CEPR Discussion Papers 608, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Soh, Byung Hee, 1986. "Political Business Cycles in Industrialized Democratic Countries," Kyklos, Blackwell Publishing, vol. 39(1), pages 31-46.
  4. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, 07. [Downloadable!] (restricted)
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  5. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany. [Downloadable!]
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  6. Grimes, Arthur, 1993. "International Reserves under Floating Exchanges Rates: Two Paradoxes Explained," The Economic Record, The Economic Society of Australia, vol. 69(207), pages 411-15, December.
  7. Carlsen, Fredrik, 1997. " Opinion Polls and Political Business Cycles: Theory and Evidence for the United States," Public Choice, Springer, vol. 92(3-4), pages 387-406, September. [Downloadable!] (restricted)
  8. Bahmani-Oskooee, M & Brown, F, 2002. "Demand for International Reserves: A Review Article," Applied Economics, Taylor and Francis Journals, vol. 34(10), pages 1209-26, July. [Downloadable!] (restricted)
  9. Axel Dreher & Roland Vaubel, 2004. "Do IMF and IBRD Cause Moral Hazard and Political Business Cycles? Evidence from Panel Data," Open Economies Review, Springer, vol. 15(1), pages 5-22, January. [Downloadable!] (restricted)
  10. Berger, Helge & Woitek, Ulrich, 1997. " Searching for Political Business Cycles in Germany," Public Choice, Springer, vol. 91(2), pages 179-97, April. [Downloadable!] (restricted)
  11. repec:rus:hseeco:181565 is not listed on IDEAS
  12. Joshua Aizenman & Nancy P. Marion, 2002. "The high demand for international reserves in the Far East: what's going on?," Proceedings, Federal Reserve Bank of San Francisco, issue Sep. [Downloadable!]
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  13. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June. [Downloadable!] (restricted)
  14. Adi Brender & Allan Drazen, 2005. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Cross-Section of Countries," NBER Working Papers 11862, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Axel Dreher & Bernhard Herz & Volker Karb, 2006. "Is there a causal link between currency and debt crises?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 305-325. [Downloadable!]
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  16. Philip Lane & Dominic Burke, 2001. "The Empirics of Foreign Reserves," CEG Working Papers 20013, Trinity College Dublin, Department of Economics. [Downloadable!]
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  17. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November. [Downloadable!] (restricted)
  18. Edwards, Sebastian, 1985. "On the interest-rate elasticity of the demand for international reserves: Some evidence from developing countries," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 287-295, June. [Downloadable!] (restricted)
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  19. Williamson, John, 1976. " Exchange-Rate Flexibility and Reserve Use," Scandinavian Journal of Economics, Blackwell Publishing, vol. 78(2), pages 327-39.
  20. Rasmus Fatum & Michael M. Hutchison, . "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," EPRU Working Paper Series 99-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  21. Axel Dreher, 2004. "The Influence of IMF Programs on the Re-election of Debtor Governments," Economics and Politics, Blackwell Publishing, vol. 16(1), pages 53-76, 03. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Axel Dreher & Martin Gassebner & Lars-H. R. Siemers, 2007. "Does Terror Threaten Human Rights? Evidence from Panel Data," KOF Working papers 07-156, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
    Other versions:
  2. Axel Dreher & Silvia Marchesi & James Raymond Vreeland, 2007. "The Politics of IMF Forecasts," Working Papers 124, University of Milano-Bicocca, Department of Economics, revised Oct 2007. [Downloadable!]
    Other versions:
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