Elections and the timing of devaluations

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Abstract:This paper presents a rational political budget cycle model for the open economy, in which devaluations are delayed in the run-up to elections, in order to increase the electoral chances of the party in office. By concentrating on the closed economy, previous political cycle models had overlooked the influence of elections on the behavior of exchange rates.We introduce voter uncertainty in two different dimensions. Not only are voters uncertain regarding the competency of the incumbent. They also ignore the degree to which the incumbent is opportunistic, i.e. willing to distort the economy for electoral gain. When there is only uncertainty about competence, we obtain a separating equilibrium, like in the previous political budget cycle literature.However, when uncertainty about opportunism is introduced, a partially pooling equilibrium emerges: an incompetent, opportunistic incumbent delays a devaluation until after elections, mimicking a competent incumbent, while the competent does not distort the optimal pattern of the exchange rate, regardless of the degree of opportunism.The model's prediction that there is a tendency to delay devaluations until after elections is used to look at the empirical evidence on devaluations around elections. JEL classification codes: E31, D72.

Political Cycle, Real Exchange Rate and Aggregate Supply in Mexico

“…Stein and Streb (2004) analyze the relationship between the timing of elections and the behavior of the exchange rate, specially the decisions to devaluate the currency, a measure that has strong political repercussions. The authors study 26 Latin American countries between 1960 and 1994, in which there were 242 elections, 131 of which were Presidential elections.…”

Banking on Democracy

“…Scholars have growing interest in how strongly law and politics are key drivers of international private capital flows (Rajan and Zingales, 2003) and financial crises (Santiso, 2006;Martínez and Santiso, 2003;Stein and Streb, 2004;Whitehead, 2004). Both portfolio and foreign direct investment in emerging countries are sensitive to political variables Neut and Santiso, 2006).…”

Signaling in Political Budget Cycles: How Far Are You Willing to Go?

“…Rather, there is a partially pooling equilibrium as characterized in Proposition 2. 8 Unlike this paper, where elections are probabilistic so the incumbent has an incentive to show it is competent for sure to increase as much as possible the probability of reelection, Stein and Streb (1999) have a model with two-dimensional asymmetric information where elections depend solely on the competency of the incumbent. Consequently, an incumbent only needs to establish that the probability it is competent is above average to be reelected for sure.…”

“…When opportunism is not common knowledge, incompetent incumbents can also distort economic policy. This paper is related to Stein and Streb (1999), who model the electoral manipulation of exchange rates in a signaling game that is a special case of the present framework.…”