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Foreign Exchange Intervention And The Political Business Cycle: A Panel Data Analysis

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Author Info
Axel Dreher (Thurgau Institute of Economics & University of Konstanz)
Roland Vaubel (University of Mannheim)

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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 158 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index regardless of the exchange rate system. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique.

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Paper provided by EconWPA in its series International Finance with number 0505009.

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Date of creation: 18 May 2005
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Handle: RePEc:wpa:wuwpif:0505009

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Keywords: Foreign exchange interventions political business cycles

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Soh, Byung Hee, 1986. "Political Business Cycles in Industrialized Democratic Countries," Kyklos, Blackwell Publishing, vol. 39(1), pages 31-46.
  4. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, 07. [Downloadable!] (restricted)
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  5. Grimes, Arthur, 1993. "International Reserves under Floating Exchanges Rates: Two Paradoxes Explained," The Economic Record, The Economic Society of Australia, vol. 69(207), pages 411-15, December.
  6. Carlsen, Fredrik, 1997. " Opinion Polls and Political Business Cycles: Theory and Evidence for the United States," Public Choice, Springer, vol. 92(3-4), pages 387-406, September. [Downloadable!] (restricted)
  7. Bahmani-Oskooee, M & Brown, F, 2002. "Demand for International Reserves: A Review Article," Applied Economics, Taylor and Francis Journals, vol. 34(10), pages 1209-26, July. [Downloadable!] (restricted)
  8. Axel Dreher & Roland Vaubel, 2004. "Do IMF and IBRD Cause Moral Hazard and Political Business Cycles? Evidence from Panel Data," Open Economies Review, Springer, vol. 15(1), pages 5-22, January. [Downloadable!] (restricted)
  9. Berger, Helge & Woitek, Ulrich, 1997. " Searching for Political Business Cycles in Germany," Public Choice, Springer, vol. 91(2), pages 179-97, April. [Downloadable!] (restricted)
  10. repec:rus:hseeco:181565 is not listed on IDEAS
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  12. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June. [Downloadable!] (restricted)
  13. Axel Dreher & Bernhard Herz & Volker Karb, 2006. "Is there a causal link between currency and debt crises?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 305-325. [Downloadable!]
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  14. Philip Lane & Dominic Burke, 2001. "The Empirics of Foreign Reserves," CEG Working Papers 20013, Trinity College Dublin, Department of Economics. [Downloadable!]
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  15. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November. [Downloadable!] (restricted)
  16. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February. [Downloadable!] (restricted)
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  17. Edwards, Sebastian, 1985. "On the interest-rate elasticity of the demand for international reserves: Some evidence from developing countries," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 287-295, June. [Downloadable!] (restricted)
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  18. Williamson, John, 1976. " Exchange-Rate Flexibility and Reserve Use," Scandinavian Journal of Economics, Blackwell Publishing, vol. 78(2), pages 327-39.
  19. Rasmus Fatum & Michael M. Hutchison, . "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," EPRU Working Paper Series 99-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  20. Axel Dreher, 2004. "The Influence of IMF Programs on the Re-election of Debtor Governments," Economics and Politics, Blackwell Publishing, vol. 16(1), pages 53-76, 03. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Axel Dreher & Martin Gassebner & Lars-H. R. Siemers, 2007. "Does Terror Threaten Human Rights? Evidence from Panel Data," Working papers 07-156, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
    Other versions:
  2. Axel Dreher & Silvia Marchesi & James Raymond Vreeland, 2007. "The Politics of IMF Forecasts," Working Papers 124, University of Milano-Bicocca, Department of Economics, revised Oct 2007. [Downloadable!]
    Other versions:
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