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

IMF Working Papers, June 1, 2004

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In response to high and chronic inflation, countries have adopted different stabilization policies.
The extent to which these stabilization programs were designed for political motives is not clear.
Exchange-rate-based stabilizations (ERBS) create an initial consumption boom followed by a contraction.
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.

ERBS create an initial consumption boom followed by a contraction.
MBS generate a consumption bust followed by a recovery.
The choice of nominal anchor depends on elections, supporting the existence of political opportunism.
ERBS are, on average, launched before elections.
MBS are, on average, launched after elections.

Subject: Consumption, Exchange rate anchor, Inflation, International reserves, Nominal anchors
Keywords: election cycle, ERBS attempt, ERBS program, next election, stabilization program, WP

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