Elections and Exchange Rate Policy Cycles

Abstract

This paper presents a theoretical model based on the distributive effects of RER changes that generates RER electoral cycles of the type identified in Latin American countries: more appreciated RER before elections and more depreciated after elections. Typically, a RER depreciation favors exporters and import competing domestic industries, to the detriment of consumers. These RER cycles are generated by imperfect information on policymakers' preferences, which are concealed from voters with the help of an unstable macroeconomic environment. Exchange rate cycles result from the interplay between the electoral power of the nontradable sector and the tradable sector's ability to lobby the government.RER cycle, electoral cycle, distributive conflict