Regime uncertainty and exchange rate dynamics: a political economy perspective

Emilio Ocampo and Nicolás Cachanosky

No 908, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA

Abstract: Exchange rates reflect macroeconomic fundamentals, which in turn are regime dependent. In politically unstable countries, expectations of regime change can have a significant impact on exchange rate dynamics. We exploit Argentina’s unexpected 2019 primary election results as a natural experiment to gauge the impact of a change in such expectations. When populist candidate Alberto Fernández’s victory margin (15.6%) doubled pre-election polling predictions (7.2%), financial markets immediately recalculated the probability of a change in regime. Using parallel market exchange rates, we estimate that the real exchange rate differential between populist and non-populist regimes exceeds 100%. This large gap creates extreme political sensitivity: regime change expectations of 7-16% can trigger 10% exchange rate movements. Our findings help explain persistent exchange rate volatility in emerging economies and highlight the limitations of purely macroeconomic stabilization approaches when political sustainability is uncertain.

Keywords: exchange rates; regime uncertainty; Argentina (search for similar items in EconPapers)
JEL-codes: E42 E52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2025-09
New Economics Papers: this item is included in nep-mon and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:908

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