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Why are realignments postponed? A model of exchange rate revisions with opportunistic governments

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  • Pierre-Guillaume Méon

Abstract

In this paper we investigate the consequences of elections on the willingness of office-motivated governments to defend a pre-announced parity in the presence of output shocks in a fixed exchange rate regime with an escape clause. Knowing that voters rationally interpret realignments as a sign of incompetence, incumbents refrain from realigning before elections. They can do so either when they are competent or when shocks are small enough. Realignments are therefore more likely and output is less volatile on the morrow than on the eve of elections. The welfare impact of elections is ambiguous. Copyright Blackwell Publishing Ltd and The Victoria University of Manchester, 2004.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/8380.

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Date of creation: Jun 2004
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Publication status: Published in: The Manchester School (2004) v.72 n° 3,p.298-316
Handle: RePEc:ulb:ulbeco:2013/8380

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  1. Klein, Michael W. & Marion, Nancy P., 1997. "Explaining the duration of exchange-rate pegs," Journal of Development Economics, Elsevier, Elsevier, vol. 54(2), pages 387-404, December.
  2. Ernesto H. Stein & Jorge M. Streb, 1997. "Political Stabilization Cycles in High Inflation Economies," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 123, Universidad del CEMA.
  3. Leonardo Bartolini & Allan Drazen, 1996. "When liberal policies reflect external shocks, what do we learn?," Staff Reports, Federal Reserve Bank of New York 18, Federal Reserve Bank of New York.
  4. Bussiere, Matthieu & Mulder, Christian, 2000. "Political Instability and Economic Vulnerability," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 5(4), pages 309-30, October.
  5. James Forder, 2001. "The Theory of Credibility and the Reputation-bias of Policy," Review of Political Economy, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(1), pages 5-25.
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Cited by:
  1. Axel Dreher & Stefanie Walter, 2008. "Does the IMF Help or Hurt? The Effect of IMF programs on the likelihood and outcome of currency crises," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 08-186, KOF Swiss Economic Institute, ETH Zurich.
  2. Cermeño, Rodolfo & Grier, Robin & Grier, Kevin, 2010. "Elections, exchange rates and reform in Latin America," Journal of Development Economics, Elsevier, Elsevier, vol. 92(2), pages 166-174, July.

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