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Electoral Uncertainty and the Volatility of International Capital Flows

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Author Info
Roberto Chang

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Abstract

I study a small open economy in which elections affect and are affected by capital inflows. Two candidates, one favoring workers and another favoring entrepreneurs, run for office; the winner chooses taxes, which affect investment returns. A pro labor victory results in a "sudden stop" in investment and capital flows, reflecting a time inconsistency problem. The pro business candidate is free from time inconsistency but becomes less attractive to voters if the foreign debt is larger. Hence electoral outcomes depends on the size of the debt, which itself depends on expectations about the election. The model's politico economic equilibria has several implications. Politico economic links exacerbate the responses of financial variables to exogenous shocks. Self fulfilling equilibria may exist. Policies that alleviate the pro labor candidate's commitment problem contribute to financial stability but also, and perhaps more surprisingly, to the chances of a pro labor victory in the elections. A redistribution of wealth has ambiguous although predictable effects on politico economic outcomes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12448.

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Date of creation: Aug 2006
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Handle: RePEc:nbr:nberwo:12448

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Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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. Christian B. Mulder & Matthieu Bussiere, 1999. "Political Instability and Economic Vulnerability," IMF Working Papers 99/46, International Monetary Fund. [Downloadable!]
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  2. Paul Masson, 1999. "Multiple equilibria, contagion, and the emerging market crises," Proceedings, Federal Reserve Bank of San Francisco, issue Sep. [Downloadable!]
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  3. repec:rus:hseeco:72137 is not listed on IDEAS
  4. Roberto Chang, 2005. "Financial Crises and Political Crises," NBER Working Papers 11779, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January. [Downloadable!] (restricted)
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  1. Manuela Goretti, 2005. "The Brazilian Currency Turmoil of 2002: A Nonlinear Analysis," International Finance 0506001, EconWPA. [Downloadable!]
    Other versions:
  2. repec:bep:mactop:v:6:y:2006:i:2:p:1375-1375 is not listed on IDEAS
  3. Hefeker, Carsten, 2007. "Default, Electoral Uncertainty and the Choice of Exchange Regime," Proceedings of the German Development Economics Conference, Göttingen 2007 13, Verein für Socialpolitik, Research Committee Development Economics. [Downloadable!]
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