Political instability and economic vulnerability

Abstract

This paper analyzes and tests the influence of political instability on economic vulnerability in the context of the 1994 and 1997 crisis episodes. It constructs four political variables that aim at quantifying political instability. The paper finds that, for countries with weak economic fundamentals and low reserves, political instability has a strong impact on economic vulnerability. The estimation results suggest that including political variables in economic models does improve their power to explain and predict economic crises. The paper concludes that countries are more economically vulnerable during, and especially following, election periods, and when election results are less stable than at other times. Copyright © 2000 John Wiley & Sons, Ltd.

Why are realignments postponed? A model of exchange rate revisions with opportunistic governments

“…In accordance with this finding, Stein and Streb (1998) and Bussière and Mulder (2000) recall several instances in which governments chose not to address real issues before an election so as to keep inflation and the exchange rate under control. However, those authors' observations remain anecdotal.…”

“…For instance, Edwards (1994) found that in Latin American presidential democracies 77 per cent of the devaluations took place within the first 18 months of the government being in office. His finding is corroborated by Klein and Marion (1997), Eichengreen et al (1995) and Bussière and Mulder (2000) who observed that the probability of a devaluation significantly increases in post-election periods. Furthermore, Eichengreen et al (1995) also provide some evidence that revaluations tend to follow government defeat.…”

Why are realignments postponed? A model of exchange rate revisions with opportunistic governments

“…In accordance with this finding, Stein and Streb (1998) and Bussière and Mulder (2000) recall several instances in which governments chose not to address real issues before an election so as to keep inflation and the exchange rate under control. However, those authors' observations remain anecdotal.…”

“…For instance, Edwards (1994) found that in Latin American presidential democracies 77 per cent of the devaluations took place within the first 18 months of the government being in office. His finding is corroborated by Klein and Marion (1997), Eichengreen et al (1995) and Bussière and Mulder (2000) who observed that the probability of a devaluation significantly increases in post-election periods. Furthermore, Eichengreen et al (1995) also provide some evidence that revaluations tend to follow government defeat.…”

In Defense of Early Warning Signals

“…For that reason, to the extent that reforms typically have benefits in the long run but costs in the short run, the occurrence of elections tends to delay reforms. Empirically, these political economy factors seem to play an important role in the unfolding of currency crises (see Bussière and Mulder, 2000). In that paper, a standard EWS model very similar to the one presented here was augmented with political variables, which turned out to have a significant effect.…”

The Interactions of Strength of Governments and Alternative Exchange Rate Regimes in Avoiding Currency Crises

“…It has been well documented that weak political institutions contribute significantly to the likelihood of currency crises (Edwards 1996;Bernhard and Leblang 1999;Bussiere and Mulder 2000;Frieden, Ghezzi, and Stein 2001;Poirson 2001;Block 2002;Meon and Rizzo 2002;Alesina and Wagner 2003;Calvo and Mishkin 2003;Shimpalee and Breuer 2006). Here we go further to test the hypotheses developed by Willett (2007) that political instability and weak governments more generally are an important part of the explanation for the crisis proneness of adjustable-peg exchange rate regimes.…”

Why are realignments postponed? A model of exchange rate revisions with opportunistic governments

“…In accordance with this finding, Stein and Streb (1998) and Bussière and Mulder (2000) recall several instances in which governments chose not to address real issues before an election so as to keep inflation and the exchange rate under control. However, those authors' observations remain anecdotal.…”

“…For instance, Edwards (1994) found that in Latin American presidential democracies 77 per cent of the devaluations took place within the first 18 months of the government being in office. His finding is corroborated by Klein and Marion (1997), Eichengreen et al (1995) and Bussière and Mulder (2000) who observed that the probability of a devaluation significantly increases in post-election periods. Furthermore, Eichengreen et al (1995) also provide some evidence that revaluations tend to follow government defeat.…”

In Defense of Early Warning Signals

“…For that reason, to the extent that reforms typically have benefits in the long run but costs in the short run, the occurrence of elections tends to delay reforms. Empirically, these political economy factors seem to play an important role in the unfolding of currency crises (see Bussière and Mulder, 2000). In that paper, a standard EWS model very similar to the one presented here was augmented with political variables, which turned out to have a significant effect.…”

The Interactions of Strength of Governments and Alternative Exchange Rate Regimes in Avoiding Currency Crises

“…It has been well documented that weak political institutions contribute significantly to the likelihood of currency crises (Edwards 1996;Bernhard and Leblang 1999;Bussiere and Mulder 2000;Frieden, Ghezzi, and Stein 2001;Poirson 2001;Block 2002;Meon and Rizzo 2002;Alesina and Wagner 2003;Calvo and Mishkin 2003;Shimpalee and Breuer 2006). Here we go further to test the hypotheses developed by Willett (2007) that political instability and weak governments more generally are an important part of the explanation for the crisis proneness of adjustable-peg exchange rate regimes.…”

Why are realignments postponed? A model of exchange rate revisions with opportunistic governments

“…In accordance with this finding, Stein and Streb (1998) and Bussière and Mulder (2000) recall several instances in which governments chose not to address real issues before an election so as to keep inflation and the exchange rate under control. However, those authors' observations remain anecdotal.…”

“…For instance, Edwards (1994) found that in Latin American presidential democracies 77 per cent of the devaluations took place within the first 18 months of the government being in office. His finding is corroborated by Klein and Marion (1997), Eichengreen et al (1995) and Bussière and Mulder (2000) who observed that the probability of a devaluation significantly increases in post-election periods. Furthermore, Eichengreen et al (1995) also provide some evidence that revaluations tend to follow government defeat.…”

In Defense of Early Warning Signals

“…For that reason, to the extent that reforms typically have benefits in the long run but costs in the short run, the occurrence of elections tends to delay reforms. Empirically, these political economy factors seem to play an important role in the unfolding of currency crises (see Bussière and Mulder, 2000). In that paper, a standard EWS model very similar to the one presented here was augmented with political variables, which turned out to have a significant effect.…”

The Interactions of Strength of Governments and Alternative Exchange Rate Regimes in Avoiding Currency Crises

“…It has been well documented that weak political institutions contribute significantly to the likelihood of currency crises (Edwards 1996;Bernhard and Leblang 1999;Bussiere and Mulder 2000;Frieden, Ghezzi, and Stein 2001;Poirson 2001;Block 2002;Meon and Rizzo 2002;Alesina and Wagner 2003;Calvo and Mishkin 2003;Shimpalee and Breuer 2006). Here we go further to test the hypotheses developed by Willett (2007) that political instability and weak governments more generally are an important part of the explanation for the crisis proneness of adjustable-peg exchange rate regimes.…”