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Regime uncertainty and exchange rate dynamics: a political economy perspective

Author

Listed:
  • Emilio Ocampo
  • Nicolás Cachanosky

Abstract

Exchange rates reflect macroeconomic fundamentals, which in turn are regime dependent. In politically unstable countries, expectations of regime change can have a significant impact on exchange rate dynamics. We exploit Argentina’s unexpected 2019 primary election results as a natural experiment to gauge the impact of a change in such expectations. When populist candidate Alberto Fernández’s victory margin (15.6%) doubled pre-election polling predictions (7.2%), financial markets immediately recalculated the probability of a change in regime. Using parallel market exchange rates, we estimate that the real exchange rate differential between populist and non-populist regimes exceeds 100%. This large gap creates extreme political sensitivity: regime change expectations of 7-16% can trigger 10% exchange rate movements. Our findings help explain persistent exchange rate volatility in emerging economies and highlight the limitations of purely macroeconomic stabilization approaches when political sustainability is uncertain.

Suggested Citation

  • Emilio Ocampo & Nicolás Cachanosky, 2025. "Regime uncertainty and exchange rate dynamics: a political economy perspective," CEMA Working Papers: Serie Documentos de Trabajo. 908, Universidad del CEMA.
    • Handle: RePEc:cem:doctra:908
    as

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    References listed on IDEAS

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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