Publication

This paper investigates how electoral timing influences policymakers' responses to currency crises. The author explains how previous empirical research has shown that elections significantly influence both the probability a currency crisis emerges and the government's policy responses to such crises. The paper provides a theoretical explanation for such empirical findings and presents a political business cycle model based on exchange rate policy, in which incumbents face a tradeoff between their wish to signal competence and the high cost of exchange rate defenses in response to currency crises. The author details how economic models predict that competent incumbents are more likely to defend currencies in response to crises occurring before elections, while incompetent policymakers always devalue. The paper explains that attacks occurring after elections are usually predicted to result in devaluations for all types of policymakers.