May 2, 2024 — Lots of countries are voting.  Recent elections in a number of Emerging Market and Developing Economies (EMDEs) have demonstrated anew the proposition that major currency devaluations are more likely to come immediately after an election, rather than before one. Nigeria, Turkey, Argentina, Egypt, and Indonesia are five countries that have experienced post-election devaluations within the last year.

1. The election-devaluation cycle

Economists will recall a 50-year-old paper by Nobel Prize winning professor Bill Nordhaus as essentially initiating research on the Political Business Cycle (PBC).  The PBC refers to governments’ general inclination towards fiscal and monetary expansion in the year leading up to an election, in hopes of re-electing the incumbent president or at least the incumbent party.  The idea is that growth in output and employment will accelerate before the election, boosting the government’s popularity, whereas the major costs in terms of debt troubles and inflation will come after the election. read more