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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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References

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  1. Francisco José Veiga, 2000. "Delays of Inflation Stabilizations," Economics and Politics, Wiley Blackwell, vol. 12(3), pages 275-295, November.
  2. Kenneth Rogoff & Anne Sibert, 1986. "Elections and Macroeconomic Policy Cycles," NBER Working Papers 1838, National Bureau of Economic Research, Inc.
  3. Stanley Fischer & Ratna Sahay & Carlos A. Végh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 02/197, International Monetary Fund.
  4. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
  5. Alberto Alesina & Alex Cukierman, 1987. "The Politics of Ambiguity," NBER Working Papers 2468, National Bureau of Economic Research, Inc.
  6. Rebelo, Sérgio, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," CEPR Discussion Papers 1220, C.E.P.R. Discussion Papers.
  7. Carlos A. Végh, 1992. "Stopping High Inflation: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 626-695, September.
  8. Harrington, Joseph E, Jr, 1993. "Economic Policy, Economic Performance, and Elections," American Economic Review, American Economic Association, vol. 83(1), pages 27-42, March.
  9. 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.
  10. Kiguel, Miguel A. & Liviatan, Nissan, 1988. "Inflationary rigidities and stabilization policies," Policy Research Working Paper Series 4, The World Bank.
  11. Ernesto H. Stein & Jorge M. Streb, 1995. "Political Stabilization Cycles in High Inflation Economies," IDB Publications 6857, Inter-American Development Bank.
  12. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  13. 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.
  14. David M. Gould, 1999. "Does the choice of nominal anchor matter?," Center for Latin America Working Papers 0499, Federal Reserve Bank of Dallas.
  15. 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.
  16. 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.
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Cited by:
  1. Stefan Krause & Fabio Méndez, 2005. "Policy Makers' Preferences, Party Ideology, and the Political Business Cycle," Southern Economic Journal, Southern Economic Association, vol. 71(4), pages 752-767, April.
  2. Seghezza, Elena & Morelli, Pierluigi, 2014. "Conflict inflation and delayed stabilization," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 171-184.
  3. 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).
  4. Vítor Castro, 2003. "The Impact of Conflicts of Interest on Inflation Stabilization," NIPE Working Papers 8/2003, NIPE - Universidade do Minho.
  5. Francisco José Veiga & Ari Aisen, 2006. "Political Instability and Inflation Volatility," IMF Working Papers 06/212, International Monetary Fund.
  6. 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.
  7. 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.
  8. Francisco Joséveiga, 2005. "Does IMF Support Accelerate Inflation Stabilization?," Open Economies Review, Springer, vol. 16(4), pages 321-340, October.

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