An analysis of business cycles and currency crises from a political economy perspective

Abstract

The thesis, consisting of four chapters, empirically tests whether political factors exert systematic influence on economic policy and whether such influences affect real macroeconomic variables. The first chapter provides the overview of the thesis. The second chapter, 'A Reexamination of Political Business Cycles in OECD Countries', takes a fresh look at. the issue of existence of political business cycles. The main results of this chapter are as follows. First, the outcomes of elections are found to contain useful information about the future movements of real economic activities. Second, countries do experience a temporary decline (increase) in their growth rate of output after the election of center-right, (center-left) governments. Third, monetary policy instruments exhibit opportunistic cycle, while fiscal policy instruments do not share the same characteristics. The third chapter, 'Uncertain Timing of Policy Changes and Its Macroeconomic Consequences', analyzes how do economic agents react to policies which are known to be of uncertain duration. The chapter examines whether such uncertainty in policies has any welfare cost and how do the short run dynamics of macroeconomic variables differ from its long run dynamics in an economy with uncertain duration of policies compared to a perfect foresight, economy. The fourth chapter, 'Political Determinants of Currency Crises', focuses on the interaction between political events in emerging markets and how they are associated with the timing of currency crises in these economies. It finds that nearly five out of every ten currency crises in Latin America and Asia have taken place within or less than six months of completion of an election or change of government. It then estimates a series of qualitative dependent. variable models. The results of the regression analysis are quite striking: a variety of tests and a series of sensitivity and robustness analyses uniformly suggest that, political variables, like timing of election/change of government, are statistically significant, in explaining speculative attacks even when the behavior of a large number of macroeconomic fundamentals is accounted for

Author-supplied keywords

Cite this document ^(BETA)