Money-Based vs. Exchange-Rate-Based Stabilization: Is There Room for Political Opportunism?

Ari Aisen

IMF Staff Papers, 2007, vol. 54, issue 2, pages 385-417

Abstract: In response to high and chronic inflation, countries have adopted different stabilization policies. However, the extent to which these stabilization programs were designed for political motives is not clear. Because exchange-rate-based stabilizations (ERBS) create an initial consumption boom followed by a contraction, whereas money-based stabilizations generate a consumption bust followed by a recovery, policymakers may take into account the timing of elections when determining the nominal anchor for stabilization. This paper finds strong evidence that the choice of nominal anchor depends on elections, implying the existence of political opportunism. ERBS are, on average, launched before elections, whereas MBS are set after them. IMF Staff Papers (2007) 54, 385–417. doi:10.1057/palgrave.imfsp.9450008

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