Policy Responses to Balance-of-Payments Crises: The Role of Elections

J. Lawrence Broz (), Maya J. Duru () and Jeffry Frieden
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J. Lawrence Broz: University of California, San Diego
Maya J. Duru: University of California, San Diego

Open Economies Review, 2016, vol. 27, issue 2, No 1, 207-227

Abstract: Abstract Governments have a number of policy tools that can be used to address pressure on the balance of payments, threatening an undesirable decline in the relative value of the national currency. They can: (1) sell reserves, (2) raise interest rates, (3) impose capital controls, (4) apply trade restrictions, or (5) depreciate the currency. While researchers typically analyze these policies in isolation from one another, we treat them as a menu of options available to election-minded politicians. We analyze the use of these five policy responses to payments difficulties for a large sample of countries since the early 1970s. We argue that governments try to minimize political costs by adopting less transparent policies first and only moving to more visible policies as necessary, delaying the most visible and politically costly policies until after elections. The evidence is consistent with these claims: governments are more likely to draw down reserves and impose capital controls before other options. If these policies do not succeed, they tend to raise interest rates. If further action is needed, they delay devaluations and trade protection until after elections.

Keywords: Currency crises; Balance-of-payments adjustment; Capital controls; Devaluations; Trade protection; Trilemma; Elections (search for similar items in EconPapers)
JEL-codes: F31 F32 F33 F36 F41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11079-016-9387-y

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