Diego Aboal () (Centro de Investigaciones Económicas (CINVE, Uruguay)) Fernando Lorenzo () (Centro de Investigaciones Económicas (CINVE-Uruguay) and Departamento de Economía. Facultad de Ciencias Sociales. Universidad de la República) Andrés Rius () (Departamento de Economía. Facultad de Ciencias Sociales. Universidad de la República. International Development Research Center (IDRC, Latin America and the Caribbean Regional Office))
Abstract
In a small open economy, the exchange rate is a key variable from the perspective of the political economy of macro policy. It is, indeed, one of the most powerful instruments that governments can use to achieve their goals. Recent theories of political macroeconomics stress that maximization of social welfare may be just one, and perhaps not the most relevant, of such goals. Others include politicians’ own permanence in power and serving the interests of specific constituencies. This paper seeks to determine the pertinence for the Uruguayan economy of the recent literature on the political economy of exchange rate management. The predictions of various theoretical models are summarized, along with the stylized facts identified in a series of recent empirical studies. After a brief discussion on the advantages of alternative specifications to test for political cycles in the exchange rate, the theoretical predictions and stylized facts are confronted with the evidence for Uruguay since 1920. The analysis shows empirical regularities consistent with political manipulation of the exchange rate around elections.
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Find related papers by JEL classification: C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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