Foreign Exchange Intervention and the Political Business Cycle: A Panel Data Analysis

Axel Dreher and Roland Vaubel

No 07-159, KOF Working papers from KOF Swiss Economic Institute, ETH Zurich

Abstract: By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 146 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre election index. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique.

Keywords: Foreign exchange interventions; Political business cycles (search for similar items in EconPapers)
Pages: 26 pages
Date: 2007-04
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-pol
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Citations: View citations in EconPapers (3)

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Journal Article: Foreign exchange intervention and the political business cycle: A panel data analysis (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:kof:wpskof:07-159

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