The political economy of speculative attacks in the developing world

Abstract

This paper examines the relationship between politics and speculative attacks in developing countries. While a burgeoning literature focuses on the economic determinants of speculative behavior, little attention has been paid to the importance of political factors. I examine the response of international capital markets to electoral and partisan changes in a sample of 78 developing countries using monthly data from January 1975 to December 1998. All other things being equal, the empirical evidence indicates that speculative attacks are more likely (1) under left rather than under right governments and (2) during the period after an election as compared with all other periods. The results suggest that models developed for OECD economies can be used to understand political-economic phenomena in developing countries.