Elections and the Timing of Devaluations
Ernesto Stein and
Jorge Streb (jms@ucema.edu.ar)
No 140, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA
Abstract:
This paper presents a rational political budget cycle model for the open economy, in which devaluations are delayed in the run-up to elections, in order to increase the electoral chances of the party in office. By concentrating on the closed economy, previous political cycle models had overlooked the influence of elections on the behavior of exchange rates. We introduce voter uncertainty in two different dimensions. Not only are voters uncertain regarding the competency of the incumbent. They also ignore the degree to which the incumbent is opportunistic, i.e. willing to distort the economy for electoral gain. When there is only uncertainty about competence, we obtain a separating equilibrium, like in the previous political budget cycle literature. However, when uncertainty about opportunism is introduced, a partially pooling equilibrium emerges: an incompetent, opportunistic incumbent delays a devaluation until after elections, mimicking a competent incumbent, while the competent does not distort the optimal pattern of the exchange rate, regardless of the degree of opportunism. The model's prediction that there is a tendency to delay devaluations until after elections is used to look at the empirical evidence on devaluations around elections.
Keywords: devaluations; elections; political budget cycles; incomplete information. (search for similar items in EconPapers)
JEL-codes: D72 E31 (search for similar items in EconPapers)
Date: 1999-01
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Citations: View citations in EconPapers (15)
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https://www.ucema.edu.ar/publicaciones/download/documentos/140.pdf (application/pdf)
Related works:
Journal Article: Elections and the timing of devaluations (2004)
Working Paper: Elections and the Timing of Devaluations (1999)
Working Paper: Elections and the Timing of Devaluations (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:140
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