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Real exchange rate cycles around elections

  • Piero Ghezzi
  • Ernesto Stein
  • Jorge M. Streb

We develop the implications of political budget 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 a devaluation, and can lead to an overvalued exchange rate before elections. We compare the implied cycle of appreciated/depreciated exchange rates to empirical evidence around elections from Latin America.

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Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 174.

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Date of creation: Aug 2000
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Handle: RePEc:cem:doctra:174
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  4. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," Research Department Publications 4164, Inter-American Development Bank, Research Department.
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