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Politics-Driven Exchange Rate Cycles : East Asia vs. Latin America

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  • Arslan Razmi

    (Department of Economics, University of Massachusetts Amherst)

Abstract

I develop the implications for real exchange rate cycles of different policy preferences, focusing in particular on broadly stylized features of major Latin American and East Asian economies. Recent political science literature has emphasized the role of factors such as the influence of the manufacturing sector and the nature of labor markets. I formalize some of these insights in a developing country framework with policy makers who inter-temporally optimize and voters/audiences that are incompletely informed. Given the choice between assigning greater weight to immediate worker purchasing power versus generating manufacturing employment and income over time, I show that countries where policy makers choose the former are more likely to experience cycles with overvaluation, current account deficits, and abrupt (postponed) devaluations.

Suggested Citation

  • 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.
    • Handle: RePEc:ums:papers:2018-14
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    References listed on IDEAS

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    More about this item

    Keywords

    Political business cycles; real exchange rate; capital accumulation; balance of payments;
    All these keywords.

    JEL classification:

    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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