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RESEARCH AND ANALYSIS:  WORKING PAPERS
Fiscal Policy Cycles and the Exchange Regime in Developing Countries 

The paper studies empirically fiscal policies around elections in 25 developing countries as affected by the exchange regime. It is argued that countries with flexible exchange regimes are less likely to engage in expansionary fiscal policies before elections because such policies can result in devaluations and inflation which affects government popularity adversely. 

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No: ERAD-97-04 

Author:
Ludger Schuknecht 
World Trade Organization 

Manuscript date: April 1997 

Abstract  Back to top

The paper studies empirically fiscal policies around elections in 25 developing countries as affected by the exchange regime. It is argued that countries with flexible exchange regimes are less likely to engage in expansionary fiscal policies before elections because such policies can result in devaluations and inflation which affects government popularity adversely. The empirical results show that governments indeed try to improve their re-election prospects with the help of expansionary fiscal policies only in countries with fixed exchange rates and adequate reserve levels. For some countries, this raises doubts about the usefulness of fixed exchange rates for stabilizing the macro economy. 

Keywords  Back to top

elections, political business cycles, fiscal policies, exchange regime, developing countries 

JEL codes: [F41], [E62], [H62] 

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