Foreign Exchange Intervention and the Political Business Cycle: A Panel Data Analysis

27 Pages Posted: 20 May 2005

See all articles by Axel Dreher

Axel Dreher

Heidelberg University

Roland Vaubel

University of Mannheim - School of Economics (VWL)

Abstract

By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 146 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique.

Keywords: Foreign exchange interventions, political business cycles

JEL Classification: F31, E58

Suggested Citation

Dreher, Axel and Vaubel, Roland, Foreign Exchange Intervention and the Political Business Cycle: A Panel Data Analysis. Available at SSRN: https://ssrn.com/abstract=725641 or http://dx.doi.org/10.2139/ssrn.725641

Axel Dreher (Contact Author)

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Roland Vaubel

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

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