Author: Ari Aisen

Publisher:

Published: 2003

Total Pages: 0

ISBN-13:

In response to the high and chronic inflation that has plagued the developing world since the 1980's, countries adopted different stabilization policies. However, to what extent these stabilization programs were designed for political rather than economic motivations is not clear. Nor is it known whether and to what degree policy-makers may take advantage of the consumption cycles derived from the different stabilization strategies in order to further their political career. Since in chronic inflation countries, exchange-rate-based stabilizations create an initial consumption boom followed by a contraction whereas money-based stabilizations generate a consumption bust followed by a recovery, policy-makers may take into account the timing of elections when determining the nominal anchor for stabilization. This paper finds strong evidence that the choice of nominal anchor to stabilize inflation depends on the election cycle. In particular, exchange-rate-based stabilizations are on average launched before elections while money-based stabilizations are set after them, implying the existence of political opportunism in the choice of stabilization anchor. The empirical estimates are obtained through the use of fairly simple econometric models based on a sample of 34 fully-fledged stabilization episodes in 11 countries with high and chronic inflation. The results are robust to different model specifications. This paper contributes to understanding of interaction between political and economic phenomena providing a useful methodology to quantify this relationship.