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Intersectoral Conflict, Exchange Rate Uncertainty, and Delays in Macroeconomic Stabilization

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  • Arslan Razmi

Abstract

An important body of literature explores the political economy reasons underlying delays in macroeconomic stabilization. This paper develops a framework to analyze the conflict between two risk‐averse groups of economic actors, one that has an endowment of internationally tradable goods and another that is endowed with nontradable goods: both endowments require imported inputs to consume. The focus is on the exchange rate policy in a developing country setup, where the government employs seigniorage revenue to finance prestabilization spending, and faces fiscal and balance of payments problems that necessitate stabilization with a step devaluation. Trade misinvoicing, the presence of exchange rate uncertainty and its interaction with import costs, the role of forward‐looking expectations, and the possibility of foreign/IMF aid influence the likelihood, timing, and terms of a consensus on stabilization in interesting ways. Crucially, given instrument uncertainty, delays may occur even if both sets of agents have perfect foresight and nontradable endowment‐holders realize that their relative position deteriorates over time.

Suggested Citation

  • Arslan Razmi, 2025. "Intersectoral Conflict, Exchange Rate Uncertainty, and Delays in Macroeconomic Stabilization," Economics and Politics, Wiley Blackwell, vol. 37(2), pages 709-723, July.
    • Handle: RePEc:bla:ecopol:v:37:y:2025:i:2:p:709-723
    DOI: 10.1111/ecpo.12336
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