REAL EXCHANGE RATE CYCLES AROUND ELECTIONS

Ernesto Stein, Jorge Streb () and Piero Ghezzi

Economics and Politics, 2005, vol. 17, issue 3, 297-330

Abstract: We develop the implications of devaluation cycles for real exchange rates in a two‐sector small open economy with a cash‐in‐advance constraint. Policy‐makers are office‐motivated politicians. Voters have incomplete information on the competence and the opportunism of incumbents. Devaluation acts like a tax, and is politically costly because it can signal the government is incompetent. This provides incumbents an incentive to postpone devaluations, and can lead to an overvalued exchange rate before elections. We compare the implied cycle of appreciated/depreciated exchange rates with empirical evidence around elections from Latin America.

Date: 2005
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https://doi.org/10.1111/j.0954-1985.2005.00155.x

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Working Paper: Real exchange rate cycles around elections (2000)
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