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

Author/Editor:

Ari Aisen

Publication Date:

June 1, 2004

Electronic Access:

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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. 2004/094

Subject:

Consumption Exchange rate anchor Inflation International reserves Nominal anchors

English

Publication Date:

June 1, 2004

ISBN/ISSN:

9781451851755/1018-5941

Stock No:

WPIEA0942004

Pages:

35

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