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Real Exchange Rate Cycles Around Elections

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  • Ernesto H. Stein
  • Jorge M. Streb
  • Piero Ghezzi

Abstract

We develop the implications of devaluation cycles for real exchange rates in a two-sector small open economy with a cash-in-advance constraint. Policy-makers are office-motivated politicians. Voters have incomplete information on the competence and the opportunism of incumbents. Devaluation acts like a tax, and is politically costly because it can signal the government is incompetent. This provides incumbents an incentive to postpone devaluations, and can lead to an overvalued exchange rate before elections. We compare the implied cycle of appreciated/depreciated exchange rates with empirical evidence around elections from Latin America. Copyright Blackwell Publishing Ltd 2005.

Suggested Citation

  • Ernesto H. Stein & Jorge M. Streb & Piero Ghezzi, 2005. "Real Exchange Rate Cycles Around Elections," Economics and Politics, Wiley Blackwell, vol. 17(3), pages 297-330, November.
  • Handle: RePEc:bla:ecopol:v:17:y:2005:i:3:p:297-330
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Grier, Kevin & Hernandez-Trillo, Fausto, 2007. "The real exchange rate process and its real effects: The cases of Mexico and the USA," Journal of Applied Economics, Universidad del CEMA, vol. 0(Number 1), pages 1-25, May.
    2. Sebastián Nieto Parra & Javier Santiso, 2008. "Wall Street and Elections in Latin American Emerging Economies," OECD Development Centre Working Papers 272, OECD Publishing.
    3. Marco Bonomo & Cristina Terra, 2005. "Elections And Exchange Rate Policy Cycles," Economics and Politics, Wiley Blackwell, vol. 17, pages 151-176, July.
    4. Marco Bonomo & Cristina Terra, 2008. "Political Business Cycles through Lobbying," THEMA Working Papers 2008-18, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    5. Joel Sebastián Schneider, 2004. "El rol de los gobernadores opositores en las elecciones presidenciales," CEMA Working Papers: Serie Documentos de Trabajo. 281, Universidad del CEMA.
    6. Marco Bonomo & Cristina Terra, 2010. "Electoral Cycles Through Lobbying," Economics and Politics, Wiley Blackwell, vol. 22(3), pages 446-470, November.
    7. Terra, Maria Cristina T., 2007. "The political economy of exchange rate in Brazil," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 656, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    8. Vladimir Klyuev, 2003. "The Distributional Consequences of Real Exchange Rate Adjustment," IMF Working Papers 03/133, International Monetary Fund.
    9. Ari Aisen, 2004. "Money-Based Versus Exchange-Rate-Based Stabilization; Is There Space for Political Opportunism?," IMF Working Papers 04/94, International Monetary Fund.
    10. Cermeño, Rodolfo & Grier, Robin & Grier, Kevin, 2010. "Elections, exchange rates and reform in Latin America," Journal of Development Economics, Elsevier, vol. 92(2), pages 166-174, July.
    11. 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.
    12. 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, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    13. Sainan Huang & Cristina Terra, 2016. "Exchange Rate Populism," Economics and Politics, Wiley Blackwell, vol. 28(1), pages 105-132, March.
    14. 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.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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