《国际政治经济学》文献资料（Political Economy of Money and Finance：Monetary System and Exchange Rate）Political Cycles and Exchange Rate-Based Stabilization

POLITICAL CYCLES/STABILIZATION 47 terest groups and coalitions in both advanced industrial and developing economies.8 Similarly,another line of research has also emphasized domestic conditions,although stressing the way politicians respond to the insti- tutional configuration of the polity rather than to interest-group poli- tics.Accordingly,Simmons argues that weak or unstable governments will be unable to implement the domestic adjustments needed to sus- tain a fixed exchange-rate regime.This line of argument was more re- cently picked up and extended by Bernhard and Leblang.They see weakness as very much a function of electoral rules and legislative insti- tutions.In systems where the cost of electoral defeat is high(majority rule)and the electoral calendar is exogenous(usually presidentialism), they argue that politicians will prefer a flexible exchange rate arrange- ment,desiring to retain the ability to manipulate monetary policy in- struments for political gain.Moreover,in extending the argument to developing countries,Leblang argues that,largely for these reasons, floating exchange rate regimes are more likely to occur in democratic than in nondemocratic polities.1 In addition to the desire to retain control of monetary policy for political business-cycle purposes, Leblang argues that increased pressure for distributive and expansion- ary policy accompanies democracy,providing policymakers with an- other motive to prefer foating to fixed exchange rates. Even though we agree with the primacy attributed to the politician's choice in this recent literature,the reasoning is at odds with our argu- ment.First,it rules out the possibility that the adoption of a fixed exchange rate becomes itself a source of strength for an unstable gov- ernment,helping it build political capital during the boom phase.In the case of exchange rate-based stabilizations,adoption of a nominal anchor itself is a policy tool for engineering an upswing in the business sFor the former,see Jeffry Frieden,"Exchange Rate Politics:Contemporary Lessons from Ameri- can History,"Review of International Political Economy 1(Spring 1994);Geoffrey Garrett and Peter Lange,"Internationalization,Institutions,and Political Change,"in Keohane and Milner(fn.7).For the latter,see Jeffry Frieden,"The Politics of Exchange Rates,"in Sebastian Edwards and Moises Naim,eds.,Mexico 1994:Anatomy of an Emerging Market Crash (Washington,D.C.:Carnegie En- dowment for International Peace,1997);Eugenio Diaz-Bonilla and Hector E.Schamis,"From Re- distribution to Stability:The Evolution of Exchange Rate Policies in Argentina,1950-98,"in Jeffry Frieden and Emesto Stein,eds.,The Currency Game:Excbange Rate Politics in Latin America(Balti- more:Johns Hopkins University Press,2001). Beth Simmons,Who Adjusts?Domestic Sources of Foreign Economic Policy during the Interwar Years (Princeton:Princeton University Press,1994). 10William Bernhard and David Leblang,"Democratic Institutions and Exchange Rate Commit- ments,"International Organization 53 (Winter 1999). David Leblang,"Domestic Political Institutions and Exchange Rate Commitments in the Devel- oping World,"International Studies Quarterly 43(December 1999)

terest groups and coalitions in both advanced industrial and developing economies.8 Similarly, another line of research has also emphasized domestic conditions, although stressing the way politicians respond to the insti￾tutional configuration of the polity rather than to interest-group poli￾tics. Accordingly, Simmons argues that weak or unstable governments will be unable to implement the domestic adjustments needed to sus￾tain a fixed exchange-rate regime.9 This line of argument was more re￾cently picked up and extended by Bernhard and Leblang.10 They see weakness as very much a function of electoral rules and legislative insti￾tutions. In systems where the cost of electoral defeat is high (majority rule) and the electoral calendar is exogenous (usually presidentialism), they argue that politicians will prefer a flexible exchange rate arrange￾ment, desiring to retain the ability to manipulate monetary policy in￾struments for political gain. Moreover, in extending the argument to developing countries, Leblang argues that, largely for these reasons, floating exchange rate regimes are more likely to occur in democratic than in nondemocratic polities.11 In addition to the desire to retain control of monetary policy for political business-cycle purposes, Leblang argues that increased pressure for distributive and expansion￾ary policy accompanies democracy, providing policymakers with an￾other motive to prefer floating to fixed exchange rates. Even though we agree with the primacy attributed to the politician’s choice in this recent literature, the reasoning is at odds with our argu￾ment. First, it rules out the possibility that the adoption of a fixed exchange rate becomes itself a source of strength for an unstable gov￾ernment, helping it build political capital during the boom phase. In the case of exchange rate–based stabilizations, adoption of a nominal anchor itself is a policy tool for engineering an upswing in the business POLITICAL CYCLES/STABILIZATION 47 8For the former, see Jeffry Frieden, “Exchange Rate Politics: Contemporary Lessons from Ameri￾can History,” Review of International Political Economy 1 (Spring 1994); Geoffrey Garrett and Peter Lange, “Internationalization, Institutions, and Political Change,” in Keohane and Milner (fn. 7). For the latter, see Jeffry Frieden, “The Politics of Exchange Rates,” in Sebastian Edwards and Moises Naim, eds., Mexico 1994: Anatomy of an Emerging Market Crash (Washington, D.C.: Carnegie En￾dowment for International Peace, 1997); Eugenio Diaz-Bonilla and Hector E. Schamis, “From Re￾distribution to Stability: The Evolution of Exchange Rate Policies in Argentina, 1950–98,” in Jeffry Frieden and Ernesto Stein, eds., The Currency Game: Exchange Rate Politics in Latin America (Balti￾more: Johns Hopkins University Press, 2001). 9Beth Simmons, Who Adjusts? Domestic Sources of Foreign Economic Policy during the Interwar Years (Princeton: Princeton University Press, 1994). 10William Bernhard and David Leblang, “Democratic Institutions and Exchange Rate Commit￾ments,” International Organization 53 (Winter 1999). 11David Leblang, “Domestic Political Institutions and Exchange Rate Commitments in the Devel￾oping World,” International Studies Quarterly 43 (December 1999). v56.1.043.schamis 3/2/04 4:29 PM Page 47

48 WORLD POLITICS cycle.Second,that reasoning is at odds with the fact that the adoption of nominal anchors in much of the developing world over the past two decades took place under democratic conditions.Third,the numerous fixed exchange-rate regimes adopted in the Latin American presiden- tial systems during the 1980s and 1990s cast serious doubts on the alleged association between fixed electoral calendars/majoritarian political institutions and a preference for flexibility in exchange-rate policy.On the contrary,we argue,it is precisely the high cost of elec- toral defeat and the exogenous nature of the electoral calendar that ex- plain the appeal of exchange rate-based stabilizations in these countries.To address this puzzle we adopt a decidedly supply-side ap- proach to the politics of exchange rates. III.EXPLAINING THE ADOPTION OF A FIXED EXCHANGE RATE REGIME A wealth of literature in economics has presented compelling evidence on the limitations and risks of a nominal anchor approach to the ex- change rate,particularly,though by no means only,when used as a sta- bilization strategy.Drawing inspiration from several episodes of chronic inflation in Latin America,empirical work in economics has produced a stylized picture of the distinctive macroeconomic dynamics associated with exchange rate-based stabilizations(ERBS).12 Typically, fixing the exchange rate leads to a relatively rapid increase in domestic absorption,the progressive decline in inflation,and the appreciation of the real exchange rate (due to price stickiness).This leads to a con- sumption-and investment-driven upturn in output,often lasting sev- eral years.13 However,on this account,a trade deficit may follow,the The rendition of the dynamics of a typical exchange-rate-based stabilization is based on Kiguel and Liviatan (fn.2);Guillermo Calvo and Carlos Vegh,"Inflation Stabilization and Nominal An- chors,"Contemporary Economic Policy 12 (April 1994);and idem,"Inflation Stabilization and Bop Crises in Developing Countries,"in John B.Tavlor and Michael Woodford,eds..Handbook of Macro- economics (New York:Elsevier,1999).Stanley Fisher advances macroeconomic models to document the strikingly different trajectories of exchange rate-based versus money-based stabilizations;Fisher, "Exchange Rate versus Money Targets in Disinflation,"in Fisher,ed.,Indexing,Inflation,and Economic Policy(Cambridge:MIT Press,1986).Calvo and Vegh and Fisher,Ratra,and Vegh survey the various theoretical models that have been put forth to account for the empirical regularities of ERBS;Calvo and Vegh,"Inflation Stabilization and BOP Crises in Developing Countries,"and Stanley Fisher,Shay Ratra,and Carlos Vegh,"Modern Hyper-and High Inflations,"both in Journal ofEconomic Literature 40(September 2002). A variety of macroeconomic models have been proposed to account for the real effects of ERBS.A partial list includes Calvo and Vegh(fn.2);Jose De Gregorio,Pablo Guidotti,and Carlos Vegh,"In- fation Stabilization and Consumption of Durable Goods,"Economic fourna/108(January 1998); Fisher(fn.12);Amartya Lahiri,"Disinflation Programs under Policy Uncertainty,"Journal ofInterna- tional Economics 50 (April 2000);Sergio Rebelo and Carlos Vegh,"Real Effects of Exchange Rate- Based Stabilizations:An Analysis of Competing Theories,"NBER Macroeconomics Anmual(1995)

cycle. Second, that reasoning is at odds with the fact that the adoption of nominal anchors in much of the developing world over the past two decades took place under democratic conditions. Third, the numerous fixed exchange-rate regimes adopted in the Latin American presiden￾tial systems during the 1980s and 1990s cast serious doubts on the alleged association between fixed electoral calendars/majoritarian political institutions and a preference for flexibility in exchange-rate policy. On the contrary, we argue, it is precisely the high cost of elec￾toral defeat and the exogenous nature of the electoral calendar that ex￾plain the appeal of exchange rate–based stabilizations in these countries. To address this puzzle we adopt a decidedly supply-side ap￾proach to the politics of exchange rates. III. EXPLAINING THE ADOPTION OF A FIXED EXCHANGE RATE REGIME A wealth of literature in economics has presented compelling evidence on the limitations and risks of a nominal anchor approach to the ex￾change rate, particularly, though by no means only, when used as a sta￾bilization strategy. Drawing inspiration from several episodes of chronic inflation in Latin America, empirical work in economics has produced a stylized picture of the distinctive macroeconomic dynamics associated with exchange rate–based stabilizations (ERBS).12 Typically, fixing the exchange rate leads to a relatively rapid increase in domestic absorption, the progressive decline in inflation, and the appreciation of the real exchange rate (due to price stickiness). This leads to a con￾sumption- and investment-driven upturn in output, often lasting sev￾eral years.13 However, on this account, a trade deficit may follow, the 48 WORLD POLITICS 12 The rendition of the dynamics of a typical exchange-rate-based stabilization is based on Kiguel and Liviatan (fn. 2); Guillermo Calvo and Carlos Végh, “Inflation Stabilization and Nominal An￾chors,” Contemporary Economic Policy 12 (April 1994); and idem, “Inflation Stabilization and  Crises in Developing Countries,” in John B. Taylor and Michael Woodford, eds., Handbook of Macro￾economics (New York: Elsevier, 1999). Stanley Fisher advances macroeconomic models to document the strikingly different trajectories of exchange rate-based versus money-based stabilizations; Fisher, “Exchange Rate versus Money Targets in Disinflation,” in Fisher, ed., Indexing, Inflation, and Economic Policy (Cambridge: MIT Press, 1986). Calvo and Végh and Fisher, Ratra, and Végh survey the various theoretical models that have been put forth to account for the empirical regularities of ERBS; Calvo and Végh, “Inflation Stabilization and BOP Crises in Developing Countries,” and Stanley Fisher, Shay Ratra, and Carlos Végh, “Modern Hyper- and High Inflations,” both in Journal of Economic Literature 40 (September 2002). 13A variety of macroeconomic models have been proposed to account for the real effects of ERBS. A partial list includes Calvo and Végh (fn. 2); José De Gregorio, Pablo Guidotti, and Carlos Végh, “In- flation Stabilization and Consumption of Durable Goods,” Economic Journal 108 ( January 1998); Fisher (fn. 12); Amartya Lahiri, “Disinflation Programs under Policy Uncertainty,” Journal of Interna￾tional Economics 50 (April 2000); Sergio Rebelo and Carlos Végh, “Real Effects of Exchange Rate￾Based Stabilizations: An Analysis of Competing Theories,” NBER Macroeconomics Annual (1995). v56.1.043.schamis 3/2/04 4:29 PM Page 48

POLITICAL CYCLES/STABILIZATION result of appreciation bolstered by the oversupply of credit and the re- duction of the real interest rate.The difficulties in financing growing current account imbalances induce governments to adopt fiscal and monetary policies that are inconsistent with the exchange rate regime.14 If this happens,the sustainability of the peg comes into question,either because perceptions of the indefensibility of the arrangement become widespread or because foreign-exchange reserves are insufficient to sus- tain the deficit.Either way,attacks on the currency bring down the par- ity,whether on the basis of self-fulfilling prophecies or of objective conditions.At this point,a balance-of-payments crisis occurs and the boom turns into bust. The dynamics of money-based stabilization(MBS),which uses a sharp contraction of the money supply as the primary policy tool in an orthodox program,differs in striking fashion.15 In this case,tightening of monetary policy leads to increased real interest rates,reduced do- mestic absorption,and an improved trade balance.Although inflation often falls,this takes time and is accompanied by severe recessionary ef- fects on output and employment.The money-based stabilization pro- gram in Spain from 1977 to 1980,for example,led to a sharp drop in GDP growth,falling inflation,and rising unemployment,over a cycle that lasted two years.Chile and Argentina in the mid-1970s are promi- nent examples of money-based stabilizations in Latin America with clear recessionary consequences. These stylized facts were initially intended to describe experiences in a handful of Latin American countries,and recent research has ques- tioned the tendency to generalize them into an "ERBS syndrome,"con- testing the alleged empirical regularities associated with the two stabilization strategies.6 Even so,a recent critical study along these lines does concede the existence of"a distinctive consumption boom during ERBS's,"confirming a pattern of real exchange rate appreciation Though conducive to inconsistent fiscal policies,not all exchange rate-based stabilizations are necessarily accompanied by such policies,and thus not all end with a bust in the medium run.For ex- ample,Mexico's Pacto of 1987,initiated nine months before the presidential election,was accompa- nied by fiscal adjustment.The downward inflation trend continued after the election,and the regime endured for several years.Similarly,Argentina's currency board arrangement appeared for quite a while to provide enduring stability,but its collapse in 2002-as well as the Mexican Tequila crisis of 1994-95-cast doubt even on these"success"stories.As Michael Klein and Nancy Marion observe, while there is large variability in the duration of pegs resulting from stabilizations,few escape an even- tual dramatic collapse;Klein and Marion,"Explaining the Duration of Exchange Rate Pegs,"NBER Working Papers 4651 (1994). is Kiguel and Liviatan (fn.2);Calvo and Vegh (fn.12). For example,William Easterly,"When Is Stabilization Expansionary?Evidence from High In- flation,"Economic Policy 22(April 1996);and A.Javier Hamman,"Exchange-Rate-Based Stabiliza- tion:A Critical Look at the Stylized Facts,"IMF Staf Papers 48 (December 2001)

result of appreciation bolstered by the oversupply of credit and the re￾duction of the real interest rate. The difficulties in financing growing current account imbalances induce governments to adopt fiscal and monetary policies that are inconsistent with the exchange rate regime.14 If this happens, the sustainability of the peg comes into question, either because perceptions of the indefensibility of the arrangement become widespread or because foreign-exchange reserves are insufficient to sus￾tain the deficit. Either way, attacks on the currency bring down the par￾ity, whether on the basis of self-fulfilling prophecies or of objective conditions. At this point, a balance-of-payments crisis occurs and the boom turns into bust. The dynamics of money-based stabilization (MBS), which uses a sharp contraction of the money supply as the primary policy tool in an orthodox program, differs in striking fashion.15 In this case, tightening of monetary policy leads to increased real interest rates, reduced do￾mestic absorption, and an improved trade balance. Although inflation often falls, this takes time and is accompanied by severe recessionary ef￾fects on output and employment. The money-based stabilization pro￾gram in Spain from 1977 to 1980, for example, led to a sharp drop in GDP growth, falling inflation, and rising unemployment, over a cycle that lasted two years. Chile and Argentina in the mid-1970s are promi￾nent examples of money-based stabilizations in Latin America with clear recessionary consequences. These stylized facts were initially intended to describe experiences in a handful of Latin American countries, and recent research has ques￾tioned the tendency to generalize them into an “ERBS syndrome,” con￾testing the alleged empirical regularities associated with the two stabilization strategies.16 Even so, a recent critical study along these lines does concede the existence of “a distinctive consumption boom during ERBS’s,” confirming a pattern of real exchange rate appreciation POLITICAL CYCLES/STABILIZATION 49 14 Though conducive to inconsistent fiscal policies, not all exchange rate–based stabilizations are necessarily accompanied by such policies, and thus not all end with a bust in the medium run. For ex￾ample, Mexico’s Pacto of 1987, initiated nine months before the presidential election, was accompa￾nied by fiscal adjustment. The downward inflation trend continued after the election, and the regime endured for several years. Similarly, Argentina’s currency board arrangement appeared for quite a while to provide enduring stability, but its collapse in 2002—as well as the Mexican Tequila crisis of 1994–95—cast doubt even on these “success” stories. As Michael Klein and Nancy Marion observe, while there is large variability in the duration of pegs resulting from stabilizations, few escape an even￾tual dramatic collapse; Klein and Marion, “Explaining the Duration of Exchange Rate Pegs,” NBER Working Papers 4651 (1994). 15Kiguel and Liviatan (fn. 2); Calvo and Végh (fn. 12). 16For example, William Easterly, “When Is Stabilization Expansionary? Evidence from High In- flation,” Economic Policy 22 (April 1996); and A. Javier Hamman, “Exchange-Rate-Based Stabiliza￾tion: A Critical Look at the Stylized Facts,” IMF Staff Papers 48 (December 2001). v56.1.043.schamis 3/2/04 4:29 PM Page 49

50 WORLD POLITICS that is unique to stabilizations using the exchange rate as an anchor.17 Of course,our argument does not require a completely uniform and au- tomatic cycle but only a pattern suggesting the possibility that ERBS will provide a quick fix for governments facing elections.Yet even if all the other stylized facts were shown to be wrong,18 the existence of a"dis- tinctive consumption boom"is sufficient to underpin the political logic of our argument.Nonetheless,it is worth emphasizing that evidence suggests that the regularity appears more pronounced in Latin America than in other regions and that the recent studies question the general- izability of the phenomena more than its aptness for the Latin Ameri- can countries from which the stylized facts were initially derived and which are the focus of our study.19 To explain the enduring nature of exchange rate-based stabilizations despite their rather risky long-term prospects,we emphasize the polit- ical attractiveness of the arrangement for governments.Here we under- line the distinctive macroeconomic dynamics of exchange rate-based stabilizations versus those of money-based stabilizations.We argue that the adoption of nominal anchors and exchange rate-based stabilization policies are particularly attractive to governments with short time hori- zons.This is especially so for governments approaching elections in presidential systems where the electoral calendar is fixed.Correctly timed,the introduction of an ERBS program will produce a decline in inflation,a consumption boom,robust output growth,and a decline in unemployment.Sometimes in high-inflation economies,in Latin America and elsewhere,the critical economic issue before elections is inflation.Governments could try to combat inflation with a money- based stabilization,but that would entail a willingness to endure falling output and rising unemployment during the run-up to an election. With an exchange rate-based stabilization,by contrast,governments do not have to sacrifice output,consumption,and employment to bring down inflation-at least not in the short to medium term:"all good things go together"for at least a while.The strong economic perfor- mance and falling inflation help the incumbent government seeking re- 17Hamman (fn.16),134.Similarly,Easterly (fn.16)finds that '"consumption growth booms a bit more than output growth in the early years of stabilization"(p.84). is And they are probably not wrong,as Fisher,Ratra,and Vegh(fn.12)show:"For ERBS,GDP growth rises very sharply upon stabilization and then stays high until T+2 only to fall sharply in T+3," in"sharp contrast to non-ERBS stabilizations"(p.868).They also reaffirm the distinctive consumption boom pattern characteristic of ERBS. The evidence presented in Hamman(fn.16),for example,suggests that the ERBS syndrome is most pronounced in Latin America,and Easterly (fn.16)does not take issue with the stylized facts for Latin America itself,aiming only"to examine whether such stylized facts underlie the patterns de- tected here in a broader sample of inflation stabilizations"(p.89)

that is unique to stabilizations using the exchange rate as an anchor.17 Of course, our argument does not require a completely uniform and au￾tomatic cycle but only a pattern suggesting the possibility that ERBS will provide a quick fix for governments facing elections. Yet even if all the other stylized facts were shown to be wrong,18 the existence of a “dis￾tinctive consumption boom” is sufficient to underpin the political logic of our argument. Nonetheless, it is worth emphasizing that evidence suggests that the regularity appears more pronounced in Latin America than in other regions and that the recent studies question the general￾izability of the phenomena more than its aptness for the Latin Ameri￾can countries from which the stylized facts were initially derived and which are the focus of our study.19 To explain the enduring nature of exchange rate–based stabilizations despite their rather risky long-term prospects, we emphasize the polit￾ical attractiveness of the arrangement for governments. Here we under￾line the distinctive macroeconomic dynamics of exchange rate–based stabilizations versus those of money-based stabilizations. We argue that the adoption of nominal anchors and exchange rate–based stabilization policies are particularly attractive to governments with short time hori￾zons. This is especially so for governments approaching elections in presidential systems where the electoral calendar is fixed. Correctly timed, the introduction of an ERBS program will produce a decline in inflation, a consumption boom, robust output growth, and a decline in unemployment. Sometimes in high-inflation economies, in Latin America and elsewhere, the critical economic issue before elections is inflation. Governments could try to combat inflation with a money￾based stabilization, but that would entail a willingness to endure falling output and rising unemployment during the run-up to an election. With an exchange rate–based stabilization, by contrast, governments do not have to sacrifice output, consumption, and employment to bring down inflation—at least not in the short to medium term: “all good things go together” for at least a while. The strong economic perfor￾mance and falling inflation help the incumbent government seeking re- 50 WORLD POLITICS 17 Hamman (fn. 16), 134. Similarly, Easterly (fn. 16) finds that “consumption growth booms a bit more than output growth in the early years of stabilization” (p. 84). 18 And they are probably not wrong, as Fisher, Ratra, and Végh (fn. 12) show: “For ERBS, GDP growth rises very sharply upon stabilization and then stays high until T+2 only to fall sharply in T+3,” in “sharp contrast to non-ERBS stabilizations” (p. 868). They also reaffirm the distinctive consumption boom pattern characteristic of ERBS. 19 The evidence presented in Hamman (fn. 16), for example, suggests that the ERBS syndrome is most pronounced in Latin America, and Easterly (fn. 16) does not take issue with the stylized facts for Latin America itself, aiming only “to examine whether such stylized facts underlie the patterns de￾tected here in a broader sample of inflation stabilizations” (p. 89). v56.1.043.schamis 3/2/04 4:29 PM Page 50

POLITICAL CYCLES/STABILIZATION 51 election,as long as the potential bust phase does not materialize before the contest. Anecdotal evidence from Latin America suggests the plausibility of the argument.For example,participants in the policy-making process report that the Real Plan,launched in Brazil in 1994,was specifically timed to help the ruling party's candidate for president,Fernando Hen- rique Cardoso,who had been trailing in the polls at the time.20 Riding the tide of falling inflation and improving economic conditions result- ing from the ERBS,Cardoso won a dramatic and convincing come- from-behind victory.Similarly,the Primavera Plan of 1988 in Argentina was widely recognized as a final attempt to control inflation before the upcoming presidential election of 1989.21 Whereas the Pri- mavera Plan,launched nine months before elections,was a gamble that did not pay off because it collapsed prior to the poll,Argentina's Con- vertibility Plan of 1991,launched seven months prior to crucial con- gressional elections,did pay off,both yielding electoral benefits for the incumbent party and,accompanied by fiscal restraint,maintaining low inflation even after the election. While our characterization of the political business cycle of stabiliza- tion may seem to rest on assumptions of adaptive expectations on behalf of voters,we believe the general story is consistent both with traditional models of the political business cycle,2 which assume adaptive expecta- tions on behalf of voters,and with newer"competence"models,23 which assume rational expectations.The implications of assuming backward- looking adaptive expectations are straightforward:voters base evaluations on the recent past and thus reward governments for the falling inflation and booming economy resulting from an exchange rate-based stabiliza- tion.Indeed,some evidence suggests that adaptive expectations models outperform rational expectations models of political business cycles in Latin America,lending plausibility to this interpretation for our pur- poses.24 However,a similar cycle can result from competence models of the political business cycle that are grounded in rational expectations.In Ernesto Stein and Jorge Streb,"Political Stabilization Cycles in High-Inflation Economies,o nal of Development Economics 56 (June 1998). 2Daniel Heymann,"From Sharp Disinflation to Hyperinflation,Twice:The Argentine Experi- ence,"in Michael Bruno,ed.,Lessons of Economic Stabilization and Its Aftermath(Cambridge:MIT Press,1991). 2Nordhaus (fn.4);and Tufte (fn.4). 2 Cukierman and Melzer(fn.4);Rogoff and Sibert(fn.4);and Torsten Persson and Guido Tabellini,Macroeconomic Policy,Credibility,and Politics(New York:Harwood Academic Publishers, 1990). Sebastian Edwards,"The Political Economy of Inflation and Stabilization in Developing Coun- ties,"Economic Development and Cultural Change 42(January 1994)

election, as long as the potential bust phase does not materialize before the contest. Anecdotal evidence from Latin America suggests the plausibility of the argument. For example, participants in the policy-making process report that the Real Plan, launched in Brazil in 1994, was specifically timed to help the ruling party’s candidate for president, Fernando Hen￾rique Cardoso, who had been trailing in the polls at the time.20 Riding the tide of falling inflation and improving economic conditions result￾ing from the ERBS, Cardoso won a dramatic and convincing come￾from-behind victory. Similarly, the Primavera Plan of 1988 in Argentina was widely recognized as a final attempt to control inflation before the upcoming presidential election of 1989.21 Whereas the Pri￾mavera Plan, launched nine months before elections, was a gamble that did not pay off because it collapsed prior to the poll, Argentina’s Con￾vertibility Plan of 1991, launched seven months prior to crucial con￾gressional elections, did pay off, both yielding electoral benefits for the incumbent party and, accompanied by fiscal restraint, maintaining low inflation even after the election. While our characterization of the political business cycle of stabiliza￾tion may seem to rest on assumptions of adaptive expectations on behalf of voters, we believe the general story is consistent both with traditional models of the political business cycle,22 which assume adaptive expecta￾tions on behalf of voters, and with newer “competence” models,23 which assume rational expectations. The implications of assuming backward￾looking adaptive expectations are straightforward: voters base evaluations on the recent past and thus reward governments for the falling inflation and booming economy resulting from an exchange rate–based stabiliza￾tion. Indeed, some evidence suggests that adaptive expectations models outperform rational expectations models of political business cycles in Latin America, lending plausibility to this interpretation for our pur￾poses.24 However, a similar cycle can result from competence models of the political business cycle that are grounded in rational expectations. In POLITICAL CYCLES/STABILIZATION 51 20Ernesto Stein and Jorge Streb, “Political Stabilization Cycles in High-Inflation Economies,” Jour￾nal of Development Economics 56 ( June 1998). 21 Daniel Heymann, “From Sharp Disinflation to Hyperinflation, Twice: The Argentine Experi￾ence,” in Michael Bruno, ed., Lessons of Economic Stabilization and Its Aftermath (Cambridge: MIT Press, 1991). 22Nordhaus (fn. 4); and Tufte (fn. 4). 23 Cukierman and Melzer (fn. 4); Rogoff and Sibert (fn. 4); and Torsten Persson and Guido Tabellini, Macroeconomic Policy, Credibility, and Politics (New York: Harwood Academic Publishers, 1990). 24Sebastian Edwards, “The Political Economy of Inflation and Stabilization in Developing Coun￾tries,” Economic Development and Cultural Change 42 ( January 1994). v56.1.043.schamis 3/2/04 4:29 PM Page 51