Real Exchange Rate Cycles Around Elections

34 Pages Posted: 8 Dec 2005

See all articles by Ernesto Stein

Ernesto Stein

Inter-American Development Bank (IDB)

Jorge M. Streb

Universidad del CEMA

Piero Ghezzi

Deutsche Bank

Abstract

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

Suggested Citation

Stein, Ernesto Hugo and Streb, Jorge Miguel and Ghezzi, Piero, Real Exchange Rate Cycles Around Elections. Economics & Politics, Vol. 17, No, 3, pp. 297-330, November 2005. Available at SSRN: https://ssrn.com/abstract=856728 or http://dx.doi.org/10.1111/j.0954-1985.2005.00155.x

Ernesto Hugo Stein

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States

Jorge Miguel Streb (Contact Author)

Universidad del CEMA ( email )

Av. Cordoba 374
Buenos Aires, CABA
Argentina

HOME PAGE: http://www.ucema.edu.ar/u/jms/

Piero Ghezzi

Deutsche Bank ( email )

31 West 52nd Street, 12th Floor
New York, NY 10019

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