Tag Archives: cycle

Elections and Devaluations

Share Button

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

Share Button

Procyclicalists Across the Atlantic Too

Share Button

     My preceding post bemoaned the tendency for many US politicians to exhibit a procyclicalist pattern:    supporting tax cuts and spending increases when the economy is booming, which should be the time to save money for a rainy day, and then re-discovering the evils of budget deficits only in times of recession, thus supporting fiscal contraction at precisely the wrong time.  Procyclicalists exacerbate the magnitude of the swings in the business cycle.

        This is not just an American problem.  A similar unfortunate cycle — large fiscal deficits when the economy is already expanding anyway, followed by fiscal contraction in response to a recession — has also been visible in the United Kingdom and euroland in recent years.   Greece and Portugal are the two most infamous examples. But the larger European countries, as well, failed to take advantage of the expansionary period 2003-07 to strengthen their public finances, and instead ran budget deficits in excess of the limits (3% of GDP) that they were supposed to obey under the Stability and Growth Pact. Then, over the last few years, politicians in both the UK and the continent have made their recessions worse by imposing aggressive fiscal austerity at precisely the wrong time. read more

Share Button

The Procyclicalists: Fiscal Austerity vs. Stimulus

Share Button

       The world is in the grip of a debate between fiscal austerity and fiscal stimulus.  Opponents of austerity worry about contractionary effects on the economy.  Opponents of stimulus worry about indebtedness and moral hazard.

Is austerity good or bad?   It is as foolish to debate this proposition as it would be to debate whether it is better for a driver to turn left or right.   It depends where the car is on the road. Sometimes left is appropriate, sometimes right.  When an economy is in a boom, the government should run a surplus; other times, when in recession, it should run a deficit.     read more

Share Button