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

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  • Axel Dreher
  • Roland Vaubel

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 149 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index. The relationship is significant and robust irrespective of the type of electoral variable, our choice of control variables and the splitting of the sample period. However, it is not significant in a narrow sample of high income countries. Foreign exchange reserves also drop relative to the domestic component of the monetary base prior to elections while the overall monetary stimulus is positive.

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Bibliographic Info

Paper provided by Thurgauer Wirtschaftsinstitut, Universität Konstanz in its series TWI Research Paper Series with number 9.

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Date of creation: 2005
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Handle: RePEc:twi:respas:0009

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Keywords: Foreign exchange interventions; political business cycles;

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Cited by:
  1. Belke, Ansgar & Potrafke, Niklas, 2012. "Does government ideology matter in monetary policy? A panel data analysis for OECD countries," Munich Reprints in Economics 20245, University of Munich, Department of Economics.
  2. Axel Dreher & Martin Gassebner & Lars-H. R. Siemers, 2010. "Globalization, Economic Freedom and Human Rights," CESifo Working Paper Series 3228, CESifo Group Munich.
  3. Andreas Steiner, 2010. "The Accumulation of Foreign Exchange by Central Banks: Fear of Capital Mobility?," Working Papers 85, Institute of Empirical Economic Research.
  4. Steiner, Andreas, 2013. "How central banks prepare for financial crises – An empirical analysis of the effects of crises and globalisation on international reserves," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 208-234.
  5. Sebastian Florian Enea & Silvia Palaºcã, 2012. "Globalization Versus Segregation - Business Cycles Synchronization In Europe," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4, pages 668-692, December.
  6. Axel Dreher & Martin Gassebner & Lars-H. R. Siemers, 2007. "Does Terror Threaten Human Rights? Evidence from Panel Data," CESifo Working Paper Series 1935, CESifo Group Munich.
  7. Axel Dreher & Silvia Marchesi & James Raymond Vreeland, 2007. "The Politics of IMF Forecasts," KOF Working papers 07-176, KOF Swiss Economic Institute, ETH Zurich.
  8. Jorge M. Streb & Daniel Lema & Pablo Garofalo, 2013. "Electoral cycles in international reserves: Evidence from Latin America and the OECD," CEMA Working Papers: Serie Documentos de Trabajo. 526, Universidad del CEMA.
  9. Dreher, Axel & Gassebner, Martin & Siemers, Lars-H. R., 2010. "Globalization, economic freedom and human rights," Center for European, Governance and Economic Development Research Discussion Papers 115, University of Goettingen, Department of Economics.
  10. Dreher, Axel & Sturm, Jan-Egbert & Haan, Jakob de, 2010. "When is a central bank governor replaced? Evidence based on a new data set," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 766-781, September.

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