Real exchange rate cycles around elections

Piero Ghezzi, Ernesto Stein and Jorge Streb (jms@ucema.edu.ar)

No 174, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA

Abstract: We develop the implications of political budget 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 a devaluation, and can lead to an overvalued exchange rate before elections. We compare the implied cycle of appreciated/depreciated exchange rates to empirical evidence around elections from Latin America.

Keywords: exchange rate overvaluation; seigniorage; political budget cycle; asymmetric information. (search for similar items in EconPapers)
JEL-codes: D72 E31 (search for similar items in EconPapers)
Date: 2000-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: REAL EXCHANGE RATE CYCLES AROUND ELECTIONS (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:174

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