POLITICAL CYCLES/STABILIZATION 45 We thus suggest a modified version of the traditional political business cycle.In the original formulation,a government facing reelection re- duces unemployment via expansionary monetary or fiscal policy prior to the election,although at the cost of increasing inflation after the election.+Corrective contractionary measures will then be introduced once the election has taken place,resulting in recession.In the cycle as- sociated with fixed exchange rates(with or without stabilization goals), a government facing reelection times the introduction of a nominal an- chor carefully-hoping for the boom to kick in before the election and for the election to occur before the potential difficulties associated with financing the current account deficit point to the possibility of a deval- uation.Viewed from the standpoint of opportunistic office-seeking governments,the political rationality of exchange rate-based stabiliza- tion explains its attractiveness despite its questionable appeal as an eco- nomic policy. The rest of the article proceeds as follows.In Section II we review the political economy literature on choice of exchange-rate arrange- ment.Taking the variant of this literature emphasizing domestic polit- ical incentives as our point of departure,we argue in Section III that the peculiar macroeconomic dynamics of exchange rate-based stabi- lizations provide democratic governments with powerful incentives to adopt such policies precisely when their time horizons are shortest: prior to elections.Section IV marshals data on decisions to fix the ex- change rate and on election timing in eighteen Latin American coun- tries from 1970 to 1999 and presents preliminary plausibility probes of our argument,whereas Section V analyzes these cycles with time- series/cross-sectional logistic regression models and describes several robustness tests.By way of conclusion,the final section discusses the implications of our findings for the broader literature on stabilization and electoral cycles. II.EXCHANGE RATE CHOICE:THE DEBATE The growing interest in recent exchange rate policies can hardly be ex- aggerated.A vast literature on the subject has addressed different +As espoused by William Nordhaus,"The Political Business Cycle,"Review ofEconomic Studies 42 (April 1975);and Edward Tufte,Political Control of the Economy (Princeton:Princeton University Press,1978).Later contributions along these lines have substituted fully rational voters for the myopic electorate of the original versions,relying instead on voters'imperfect information about government competence to drive the models.See,for example,Alex Cukierman and Alan Meltzer,A Positive Theory of Discretionary Policy,the Cost of Democratic Government,and the Benefits of a Constitu- tion,"Economic Inguiry 24(July 1986);and Kenneth Rogoff and Anne Sibert,"Elections and Macro- economic Policy Cycles,"Review ofEconomic Studies 55 (January 1988).We thus suggest a modified version of the traditional political business cycle. In the original formulation, a government facing reelection re￾duces unemployment via expansionary monetary or fiscal policy prior to the election, although at the cost of increasing inflation after the election.4 Corrective contractionary measures will then be introduced once the election has taken place, resulting in recession. In the cycle as￾sociated with fixed exchange rates (with or without stabilization goals), a government facing reelection times the introduction of a nominal an￾chor carefully—hoping for the boom to kick in before the election and for the election to occur before the potential difficulties associated with financing the current account deficit point to the possibility of a deval￾uation. Viewed from the standpoint of opportunistic office-seeking governments, the political rationality of exchange rate–based stabiliza￾tion explains its attractiveness despite its questionable appeal as an eco￾nomic policy. The rest of the article proceeds as follows. In Section II we review the political economy literature on choice of exchange-rate arrange￾ment. Taking the variant of this literature emphasizing domestic polit￾ical incentives as our point of departure, we argue in Section III that the peculiar macroeconomic dynamics of exchange rate–based stabi￾lizations provide democratic governments with powerful incentives to adopt such policies precisely when their time horizons are shortest: prior to elections. Section IV marshals data on decisions to fix the ex￾change rate and on election timing in eighteen Latin American coun￾tries from 1970 to 1999 and presents preliminary plausibility probes of our argument, whereas Section V analyzes these cycles with time￾series/cross-sectional logistic regression models and describes several robustness tests. By way of conclusion, the final section discusses the implications of our findings for the broader literature on stabilization and electoral cycles. II. EXCHANGE RATE CHOICE: THE DEBATE The growing interest in recent exchange rate policies can hardly be ex￾aggerated. A vast literature on the subject has addressed different POLITICAL CYCLES/STABILIZATION 45 4As espoused by William Nordhaus, “The Political Business Cycle,” Review of Economic Studies 42 (April 1975); and Edward Tufte, Political Control of the Economy (Princeton: Princeton University Press, 1978). Later contributions along these lines have substituted fully rational voters for the myopic electorate of the original versions, relying instead on voters’ imperfect information about government competence to drive the models. See, for example, Alex Cukierman and Alan Meltzer, “A Positive Theory of Discretionary Policy, the Cost of Democratic Government, and the Benefits of a Constitu￾tion,” Economic Inquiry 24 ( July 1986); and Kenneth Rogoff and Anne Sibert, “Elections and Macro￾economic Policy Cycles,” Review of Economic Studies 55 ( January 1988). v56.1.043.schamis 3/2/04 4:29 PM Page 45