Broken promises: regime announcements and exchange rates around elections

Pablo Garofalo and Jorge Streb ()

No 767, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA

Abstract: We study the relationship between exchange-rate regime announcements and exchange-rate dynamics around government changes by combining the IMF de jure and the Reinhart and Rogoff de facto exchange-rate regime classifications. Using monthly data from Latin American democracies, we do not identify significant exchange-rate depreciations before the change of government in any of the regimes, but we do identify a gradual exchange-rate overvaluation when regimes are fixed inconsistent (i.e., the de jure regime announcement is fixed and differs from the de facto behavior). After the change of government, the overvaluation under fixed-inconsistent regimes is abruptly corrected through significant devaluations. We thus identify a pattern of broken promises by which incumbents delay devaluations until after the change of government under fixed-inconsistent announcements, but not under fixed-consistent ones. Controlling for conditional volatility, we also detect significant “fear of floating” in flexible-inconsistent regimes before the change of government, when electoral stakes are highest.

Keywords: exchange-rate regimes; exchange-rate overvaluations; electoral cycles (search for similar items in EconPapers)
JEL-codes: D72 D78 E00 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-11
New Economics Papers: this item is included in nep-mac, nep-opm and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://ucema.edu.ar/publicaciones/download/documentos/767.pdf (application/pdf)

Related works:
Journal Article: Broken Promises: Regime Announcements and Exchange Rates around Elections (2022)
Working Paper: Broken promises: regime announcements and exchange rates around elections (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:767

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