Money-Based Versus Exchange-Rate-Based Stabilization: Is There Space for Political Opportunism?
June 1, 2004
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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.
Subject: Consumption, Exchange rate anchor, Inflation, International reserves, Nominal anchors
Keywords: election cycle, ERBS attempt, ERBS program, next election, stabilization program, WP
Pages:
35
Volume:
2004
DOI:
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Issue:
094
Series:
Working Paper No. 2004/094
Stock No:
WPIEA0942004
ISBN:
9781451851755
ISSN:
1018-5941
