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Political Business Cycles and Inflation Stabilization

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When the choice of the nominal anchor and timing of inflation stabilization is analyzed with models of political business cycles, there is room for political opportunism of policymakers. The different business cycles associated with exchange rate-based (ERBS) and money-based stabilizations (MBS) imply that the decision regarding the timing and nominal anchor of stabilization may be affected by the timing of elections. Namely, an opportunistic policymaker is more likely to implement an ERBS than a MBS before elections, while the opposite happens after elections. Empirical results obtained when estimating a multinomial logit model for a sample of 35 stabilization programs implemented in chronic inflation countries clearly support this hypothesis.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 9/2002.

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Date of creation: 2002
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Handle: RePEc:nip:nipewp:9/2002

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Keywords: Inflation stabilization; nominal anchors; political business cycles.;

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  1. Alberto Alesina & Alex Cukierman, 1987. "The Politics of Ambiguity," NBER Working Papers 2468, National Bureau of Economic Research, Inc.
  2. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
  3. Stein, Ernesto H. & Streb, Jorge M., 1998. "Political stabilization cycles in high-inflation economies," Journal of Development Economics, Elsevier, vol. 56(1), pages 159-180, June.
  4. Stanley Fischer & Ratna Sahay & Carlos A. V�gh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
  5. Kiguel, Miguel A. & Liviatan, Nissan, 1988. "Inflationary rigidities and stabilization policies," Policy Research Working Paper Series 4, The World Bank.
  6. 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.
  7. Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," NBER Chapters, in: Inflation: Causes and Effects, pages 41-98 National Bureau of Economic Research, Inc.
  8. Rebelo, S. & Vegh, C.A., 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," RCER Working Papers 405, University of Rochester - Center for Economic Research (RCER).
  9. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  10. Kiguel, Miguel A & Liviatan, Nissan, 1992. "The Business Cycle Associated.with Exchange Rate-Based Stabilizations," World Bank Economic Review, World Bank Group, vol. 6(2), pages 279-305, May.
  11. Carlos A. Végh, 1992. "Stopping High Inflation: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 626-695, September.
  12. By A. Javier Hamann, 2001. "Exchange-Rate-Based Stabilization: A Critical Look at the Stylized Facts," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 4.
  13. David M. Gould, 1999. "Does the choice of nominal anchor matter?," Center for Latin America Working Papers 0499, Federal Reserve Bank of Dallas.
  14. Carlos A. Végh Gramont & Alexander W. Hoffmaister, 1995. "Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis," IMF Working Papers 95/99, International Monetary Fund.
  15. Harrington, Joseph E, Jr, 1993. "Economic Policy, Economic Performance, and Elections," American Economic Review, American Economic Association, vol. 83(1), pages 27-42, March.
  16. Francisco José Veiga, 2000. "Delays of Inflation Stabilizations," Economics and Politics, Wiley Blackwell, vol. 12(3), pages 275-295, November.
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Cited by:
  1. Tang, Chor Foon & Abosedra, Salah, 2014. "The impacts of tourism, energy consumption and political instability on economic growth in the MENA countries," Energy Policy, Elsevier, vol. 68(C), pages 458-464.
  2. Stefan Krause & Fabio Mendez, 2006. "Does Opportunism Pay Off? A Study of Vote Functions and Policy Preferences," Emory Economics 0604, Department of Economics, Emory University (Atlanta).
  3. Sergey Sinelnikov & Pavel Kadochnikov & Ilya Trunin, 2008. "From Elections to Appointments of the Regional Governors: Major Challenges and Outcomes," Published Papers 2, Gaidar Institute for Economic Policy, revised 2008.
  4. Ari Aisen & Francisco José Veiga, 2006. "Political Instability and Inflation Volatility," NIPE Working Papers 2/2006, NIPE - Universidade do Minho.
  5. Stefan Krause & Fabio Mendez, 2003. "Policy Makers' Preferences, Party Ideology, and the Political Business Cycle," Emory Economics 0319, Department of Economics, Emory University (Atlanta).
  6. Seghezza, Elena & Morelli, Pierluigi, 2014. "Conflict inflation and delayed stabilization," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 171-184.
  7. Francisco Joséveiga, 2005. "Does IMF Support Accelerate Inflation Stabilization?," Open Economies Review, Springer, vol. 16(4), pages 321-340, October.
  8. Vítor Castro, 2003. "The Impact of Conflicts of Interest on Inflation Stabilization," NIPE Working Papers 8/2003, NIPE - Universidade do Minho.

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