Broken promises: regime announcements and exchange rates around elections

Pablo Garofalo and Jorge Streb ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study exchange rate dynamics around government changes conditional on the exchange rate regime, which we identify by combining the IMF de jure and the Reinhart and Rogoff de facto exchange rate regime classifications. This allows distinguishing whether the official exchange rate regime announcements match actual policy or are inconsistent with it. Using monthly data from Latin American democracies, we do not find significant exchange rate depreciations before the change of government in any of the regimes we identify. However, we do detect a gradual real exchange rate overvaluation when the de jure regime is fixed but the de facto policy is flexible, which is abruptly corrected after the change of government; this pattern of real exchange rate misalignments when the announcement does not match actual behavior is linked to incumbents that postpone devaluations until the successor steps in. This pattern of broken promises is typical until 1999, but it becomes exceptional thereafter.

JEL-codes: D72 D78 E00 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2021-04-01
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Published in Economía, 1, April, 2021, 21(2), pp. 1 - 32. ISSN: 1529-7470

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http://eprints.lse.ac.uk/123319/ Open access version. (application/pdf)

Related works:
Journal Article: Broken Promises: Regime Announcements and Exchange Rates around Elections (2022)
Working Paper: Broken promises: regime announcements and exchange rates around elections (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:123319

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