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Is the exchange rate politically manipulated around elections? The evidence from Uruguay

  • Diego Aboal

    ()

    (Centro de Investigaciones Económicas (CINVE, Uruguay))

  • Fernando Lorenzo

    ()

    (Centro de Investigaciones Económicas (CINVE-Uruguay) and Departamento de Economía. Facultad de Ciencias Sociales. Universidad de la República)

  • Andrés Rius

    ()

    (Departamento de Economía. Facultad de Ciencias Sociales. Universidad de la República. International Development Research Center (IDRC, Latin America and the Caribbean Regional Office))

In a small open economy, the exchange rate is a key variable from the perspective of the political economy of macro policy. It is, indeed, one of the most powerful instruments that governments can use to achieve their goals. Recent theories of political macroeconomics stress that maximization of social welfare may be just one, and perhaps not the most relevant, of such goals. Others include politicians’ own permanence in power and serving the interests of specific constituencies. This paper seeks to determine the pertinence for the Uruguayan economy of the recent literature on the political economy of exchange rate management. The predictions of various theoretical models are summarized, along with the stylized facts identified in a series of recent empirical studies. After a brief discussion on the advantages of alternative specifications to test for political cycles in the exchange rate, the theoretical predictions and stylized facts are confronted with the evidence for Uruguay since 1920. The analysis shows empirical regularities consistent with political manipulation of the exchange rate around elections.

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File URL: http://decon.edu.uy/publica/2000/Doc1800.pdf
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Paper provided by Department of Economics - dECON in its series Documentos de Trabajo (working papers) with number 1800.

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Length: 28 pages
Date of creation: Jun 2000
Date of revision:
Handle: RePEc:ude:wpaper:1800
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  1. Alberto Alesina & Gerald D. Cohen & Nouriel Roubini, 1991. "Macroeconomic Policy and Elections in OECD Democracies," NBER Working Papers 3830, National Bureau of Economic Research, Inc.
  2. Piero Ghezzi & Ernesto Stein & Jorge M. Streb, 2000. "Real exchange rate cycles around elections," CEMA Working Papers: Serie Documentos de Trabajo. 174, Universidad del CEMA.
  3. Stein, Ernesto H. & Streb, Jorge M., 1998. "Political stabilization cycles in high-inflation economies," Journal of Development Economics, Elsevier, vol. 56(1), pages 159-180, June.
  4. Kenneth Rogoff & Anne Sibert, 1986. "Elections and Macroeconomic Policy Cycles," NBER Working Papers 1838, National Bureau of Economic Research, Inc.
  5. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  6. Lindbeck, Assar, 1976. "Stabilization Policy in Open Economies with Endogenous Politicians," American Economic Review, American Economic Association, vol. 66(2), pages 1-19, May.
  7. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
  8. Juan C. Jaramillo & Roberto Steiner & Natalia Salazar, 1999. "The political economy of exchange rate policy in Colombia," WORKING PAPERS SERIES. DOCUMENTOS DE TRABAJO 009194, FEDESARROLLO.
  9. Marco Bonomo & Cristina Terra, 2005. "Elections And Exchange Rate Policy Cycles," Economics and Politics, Wiley Blackwell, vol. 17, pages 151-176, 07.
  10. William D. Nordhaus, 1989. "Alternative Approaches to the Political Business Cycle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 1-68.
  11. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  12. Moritz Kraemer, 1997. "Electoral Budget Cycles in Latin America and the Caribbean: Incidence, Causes, and Political Futility," IDB Publications (Working Papers) 6802, Inter-American Development Bank.
  13. Ernesto H. Stein & Jeffry Frieden, 2000. "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," Research Department Publications 3118, Inter-American Development Bank, Research Department.
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