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

Arslan Razmi ()
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Arslan Razmi: Department of Economics, University of Massachusetts Amherst

UMASS Amherst Economics Working Papers from University of Massachusetts Amherst, Department of Economics

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.

Keywords: Political business cycles; real exchange rate; capital accumulation; balance of payments (search for similar items in EconPapers)
JEL-codes: D72 F41 O14 O25 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-lam, nep-opm, nep-pol and nep-sea
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