Post-Election Currency Devaluations: A Global Trend Explored
Post-Election Currency Devaluations
Introduction
Renowned economist Jeffrey Frankel has made some intriguing observations regarding the trend of currency devaluation after elections. Interestingly, he has primarily focused on third-world countries in his case studies. This might lead one to wonder why he hasn't examined more developed nations like the U.S., U.K., Japan, South Korea, or even Australia. Frankel could argue that any political influence on currency in these advanced economies wouldn't result in a significant depreciation due to their independent central banks.
U.S. Fiscal and Monetary Policies
Many observers, including this writer, have highlighted that the U.S. is currently implementing a robust fiscal policy alongside a tight monetary policy. This combination has resulted in strong growth figures, prompting the Federal Reserve to maintain its tight monetary policy. Consequently, the U.S. dollar has been trading at high levels. However, it is expected that the dollar will start to decline around the time of the election. Despite this, the U.S. has maintained a strong dollar policy since the Clinton Administration, which might keep the dollar strong even after the election.
Global Elections and Currency Devaluation
An unprecedented number of voters are expected to participate in the 2024 global elections. It is a well-known fact that incumbents often implement expansive fiscal and monetary policies before elections to boost the economy and their chances of re-election. However, this often leads to currency devaluation after the election as the new government grapples with depleted reserves and current account issues.
The Election-Devaluation Cycle
The concept of a political business cycle (PBC) was introduced by Nobel laureate Professor Bill Nordhaus. The PBC refers to the tendency of governments to expand fiscal and monetary policies before an election to boost their popularity. However, the costs of these policies, such as debt troubles and inflation, usually surface after the election. Nordhaus also predicted a foreign exchange cycle, particularly relevant for emerging market and developing economies (EMDEs), where countries prop up their currencies before an election, only to devalue them afterward.
Recent Examples of Post-Election Devaluations
Several countries, including Nigeria, Turkey, Argentina, Egypt, and Indonesia, have experienced post-election currency devaluations within the last year. These devaluations are often a result of the incumbent government's efforts to overvalue the currency before the election, which are then unwound by the new administration.
Conclusion
While the association between elections and currency devaluation is not a given, it is a trend that has been observed in numerous countries. However, it's important to note that these countries often resort to measures like capital controls or multiple exchange rates to delay the inevitable devaluation. Unfortunately, many of these countries also fail to conduct free and fair elections, further insulating the government from the need to respond to the voters' verdict.
What are your thoughts on this phenomenon of post-election currency devaluation? Do you think it's a trend that will continue in the future? Share this article with your friends and let us know your thoughts. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.