Why are Realignments Postponed? A Model of Exchange Rate Revisions with Opportunistic Governments

19 Pages Posted: 6 Jul 2004

See all articles by Pierre-Guillaume Meon

Pierre-Guillaume Meon

Université Libre de Bruxelles (ULB); Université Robert Schuman Strasbourg III

Abstract

In this paper we investigate the consequences of elections on the willingness of office-motivated governments to defend a pre-announced parity in the presence of output shocks in a fixed exchange rate regime with an escape clause. Knowing that voters rationally interpret realignments as a sign of incompetence, incumbents refrain from realigning before elections. They can do so either when they are competent or when shocks are small enough. Realignments are therefore more likely and output is less volatile on the morrow than on the eve of elections. The welfare impact of elections is ambiguous.

Suggested Citation

Meon, Pierre-Guillaume, Why are Realignments Postponed? A Model of Exchange Rate Revisions with Opportunistic Governments. Available at SSRN: https://ssrn.com/abstract=540592

Pierre-Guillaume Meon (Contact Author)

Université Libre de Bruxelles (ULB) ( email )

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Brussels, Brussels 1050
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Université Robert Schuman Strasbourg III ( email )

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France
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