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Money-Based Versus Exchange-Rate-Based Stabilization: Is There Space for Political Opportunism?

Author/Editor: Aisen, Ari
Authorized for Distribution: June 1, 2004
Electronic Access: Free Full Text (PDF file size is 415KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: In response to high and chronic inflation, countries have adopted different stabilization policies. However, the extent to which these stabilization programs were designed for political motives is not clear. Since exchange-rate-based stabilizations (ERBS) create an initial consumption boom followed by a contraction, whereas money-based stabilizations (MBS) generate a consumption bust followed by a recovery, policymakers may consider the timing of elections when determining the nominal anchor for stabilization. This paper finds strong evidence that the choice of nominal anchor depends on elections, implying the existence of political opportunism. ERBS are, on average, launched before elections while MBS are set after them.
 
Series: Working Paper No. 04/94
Subject(s): Stabilization measures | Anti-inflation policy | Economic models
Author's keyword(s): Inflation Stabilization | Norminal Anchors | Political Opportunism | Elections
 
English  
    Published:   June 1, 2004        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0942004   Pages:   35
    Price:   US$15.00
       
     
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