Broken promises: regime announcements and exchange rates around elections

Garofalo, Pablo and Streb, Jorge M. (2021) Broken promises: regime announcements and exchange rates around elections. Economía, 21 (2). 1 - 32. ISSN 1529-7470

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Abstract

We study exchange rate dynamics around government changes conditional on the exchange rate regime, which we identify by combining the IMF de jure and the Reinhart and Rogoff de facto exchange rate regime classifications. This allows distinguishing whether the official exchange rate regime announcements match actual policy or are inconsistent with it. Using monthly data from Latin American democracies, we do not find significant exchange rate depreciations before the change of government in any of the regimes we identify. However, we do detect a gradual real exchange rate overvaluation when the de jure regime is fixed but the de facto policy is flexible, which is abruptly corrected after the change of government; this pattern of real exchange rate misalignments when the announcement does not match actual behavior is linked to incumbents that postpone devaluations until the successor steps in. This pattern of broken promises is typical until 1999, but it becomes exceptional thereafter.

Item Type:	Article
Official URL:	https://economia.lse.ac.uk/
Additional Information:	© 2021 LACTEA
Divisions:	LSE
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior D - Microeconomics > D7 - Analysis of Collective Decision-Making > D78 - Positive Analysis of Policy-Making and Implementation E - Macroeconomics and Monetary Economics > E0 - General > E00 - General
Date Deposited:	04 Jul 2024 16:21
Last Modified:	07 Nov 2024 05:15
URI:	http://eprints.lse.ac.uk/id/eprint/123319

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