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Is the exchange rate politically manipulated around elections? The evidence from Uruguay

Diego Aboal (), Fernando Lorenzo () and Andrés Rius
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Diego Aboal: Centro de Investigaciones Económicas (CINVE, Uruguay)
Fernando Lorenzo: Centro de Investigaciones Económicas (CINVE-Uruguay) and Departamento de Economía. Facultad de Ciencias Sociales. Universidad de la República

No 1800, Documentos de Trabajo (working papers) from Department of Economics - dECON

Abstract: In a small open economy, the exchange rate is a key variable from the perspective of the political economy of macro policy. It is, indeed, one of the most powerful instruments that governments can use to achieve their goals. Recent theories of political macroeconomics stress that maximization of social welfare may be just one, and perhaps not the most relevant, of such goals. Others include politicians’ own permanence in power and serving the interests of specific constituencies. This paper seeks to determine the pertinence for the Uruguayan economy of the recent literature on the political economy of exchange rate management. The predictions of various theoretical models are summarized, along with the stylized facts identified in a series of recent empirical studies. After a brief discussion on the advantages of alternative specifications to test for political cycles in the exchange rate, the theoretical predictions and stylized facts are confronted with the evidence for Uruguay since 1920. The analysis shows empirical regularities consistent with political manipulation of the exchange rate around elections.

Keywords: political cycles; exchange rate policy; time series models. (search for similar items in EconPapers)
JEL-codes: C22 E61 F41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2000-12
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