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Elections And Exchange Rate Policy Cycles

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  • Marco Bonomo
  • Cristina Terra

Abstract

This paper presents a theoretical model based on the distributive effects of real exchange rate (RER) changes that generates RER electoral cycles of the type identified in Latin American countries: more appreciated RER before elections and more depreciated after elections. Typically, a RER depreciation favors exporters and import‐competing domestic industries, to the detriment of consumers. These RER cycles are generated by imperfect information on policy‐makers' preferences, which are concealed from voters with the help of an unstable macroeconomic environment. Exchange rate cycles result from the interplay between the electoral power of the non‐tradable sector and the tradable sector's ability to lobby the government.

Suggested Citation

  • Marco Bonomo & Cristina Terra, 2005. "Elections And Exchange Rate Policy Cycles," Economics and Politics, Wiley Blackwell, vol. 17(2), pages 151-176, July.
    • Handle: RePEc:bla:ecopol:v:17:y:2005:i:2:p:151-176
    DOI: 10.1111/j.1468-0343.2005.00150.x
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    Cited by:

    1. Sergio Sakurai & Naercio Menezes-Filho, 2008. "Fiscal policy and reelection in Brazilian municipalities," Public Choice, Springer, vol. 137(1), pages 301-314, October.
    2. Allan Drazen & Marcela Eslava, 2006. "Pork Barrel Cycles," NBER Working Papers 12190, National Bureau of Economic Research, Inc.
    3. Bonomo, Marco Antônio Cesar & Terra, Maria Cristina T., 2005. "Special interests and political business cycles," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 597, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    4. Sakurai, Sergio N. & Menezes, Naercio A., 2008. "Fiscal policy and reelection in Brazilian municipalities," Insper Working Papers wpe_117, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    5. Marco Bonomo & Cristina Terra, 2005. "Elections And Exchange Rate Policy Cycles," Economics and Politics, Wiley Blackwell, vol. 17(2), pages 151-176, July.
    6. Arslan Razmi, 2018. "Politics-Driven Exchange Rate Cycles : East Asia vs. Latin America," UMASS Amherst Economics Working Papers 2018-14, University of Massachusetts Amherst, Department of Economics.
    7. S. Brock Blomberg & Jeffry Frieden & Ernesto Stein, 2005. "Sustaining fixed rates: The political economy of currency pegs in Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 8, pages 203-225, November.
    8. Andrade, Sandro C. & Kohlscheen, Emanuel, 2010. "Pessimistic Foreign Investors and Turmoil in Emerging Markets: The Case of Brazil in 2002," Economic Research Papers 271181, University of Warwick - Department of Economics.
    9. Jorge M. Streb, 2011. "Estabilización económica e incentivos políticos," CEMA Working Papers: Serie Documentos de Trabajo. 461, Universidad del CEMA.
    10. Pablo Garofalo & Jorge M. Streb, 2020. "Broken promises: regime announcements and exchange rates around elections," CEMA Working Papers: Serie Documentos de Trabajo. 767, Universidad del CEMA.
    11. Sakurai, Sergio Naruhiko & Menezes, Naercio, 2010. "Opportunistic and Partisan Election Cycles in Brazil: New Evidence at the Municipal Level," Insper Working Papers wpe_208, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    12. Terra, Maria Cristina T., 2007. "The political economy of exchange rate in Brazil," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 656, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    13. Diego Aboal & Fernando Lorenzo & Andrés Rius, 2000. "Is the exchange rate politically manipulated around elections? The evidence from Uruguay," Documentos de Trabajo (working papers) 1800, Department of Economics - dECON.
    14. Sergio Sakurai & Naercio Menezes-Filho, 2011. "Opportunistic and partisan election cycles in Brazil: new evidence at the municipal level," Public Choice, Springer, vol. 148(1), pages 233-247, July.
    15. Arslan Razmi, 2022. "The real consequences of policy‐driven exchange rate cycles: A stylized comparison of East Asia and Latin America," Manchester School, University of Manchester, vol. 90(2), pages 190-212, March.

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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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