Latin American democratisation and currency crises (1975–2008)
Latin America experienced a deep political transformation from authoritarianism to democracy in the recent decades. During the same period, many countries in the region also suffered severe currency crises. We contend that these two phenomena are causally related. Specifically, we argue that democratic transitions increase political demand for public spending, leading to budget deficits, and this increases investors’ propensity to liquidate local currency holdings. Moreover, we note an important ‘threshold’ effect, in which democratisation is particularly likely to lead to currency crises when the pre-existing fiscal deficits are already relatively high. Statistical analysis confirms these arguments in a sample of 25 Latin American countries in the period from 1975 to 2008.
Keywordsbudget deficit currency crises democratisation herding Latin America political regime
- Barbeira, Lorena G. and George Avelino (2011) ‘Do Political Budget Cycles Differ in Latin American Democracies?’ Economia 11(2): 101–34.Google Scholar
- Bueno de Mesquita, Bruce, Alastair Smith, Randolph M. Siverson and James Morrow (2003) The Logic of Political Survival, New York: The MIT Press.Google Scholar
- Chuwieroth, Jeffery M. and Andrew Walter (2010) ‘Financial Crises and Political Turnover: A Long Run Panoramic View’, International Political Economy Society Annual Meeting, Cambridge, MA: Harvard University.Google Scholar
- Eichengreen, Barry (1999) Toward A New International Financial Architecture: A Practical Post-Asia Agenda, Washington DC: Institute for International Economics.Google Scholar
- Eichengreen, Barry, Andrew Rose and Charles Wyplosz (1997) ‘Contagious Currency Crises’, Working Paper, http://www.econ.berkeley.edu/~eichengr/research/pre5681.pdf (accessed 14 March, 2016).
- Frieden, Jeffry and Ernesto Stein (2001) The Currency Game: Exchange Rate Politics in Latin America, Baltimore, MD: Johns Hopkins University Press.Google Scholar
- Haggard, Stephen (2000) The Political Economy of the Asian Financial Crisis, Washington DC: Institute for International Economics.Google Scholar
- Haggard, Stephen and Robert Kaufman (1995) The Political Economy of Democratic Transitions, Princeton: Princeton University Press.Google Scholar
- Haggard, Stephen and Robert Kaufman (2008) Development, Democracy, and Welfare States: Latin America, East Asia, and Eastern Europe, Princeton: Princeton University Press.Google Scholar
- Heston, Alan, Robert Summers and Bettina Aten (2011) ‘Penn World Table Version 7.0’, Center for International Comparisons of Production, Income and Prices. University of Pennsylvania, http://cid.econ.ucdavis.edu/pwt.html (accessed 4 April, 2016).
- Huntington, Samuel (1968) Political Orders in Changing Societies, New York: Yale University Press.Google Scholar
- Kahler, Miles (1990) ‘Orthodoxy and Its Alternatives: Explaining Approaches to Stabilization and Adjustment’, in Joan Nelson ed., The Politics of Economic Adjustment in Developing Nations, 33–62, Princeton: Princeton University Press.Google Scholar
- Kam, Cindy D. and Robert J. Franzese Jr (2007) Modeling and Interpreting Interactive Hypothesis in Regression Analysis, Ann Arbor: University of Michigan Press.Google Scholar
- Katzenstein, Peter (1985) Small States in World Markets: Industrial Policy in Europe, Ithaca: Cornell University Press.Google Scholar
- Kaufman, Robert and Barbara Stallings, eds. (1989) ‘Debt and Democracy in the 1980s: The Latin American Experiences’, in Debt and Democracy in Latin America, 201–23, Boulder: West View.Google Scholar
- King, Gary, Robert O. Keohane and Sidney Verba (1994) Designing Social Inquiry: Scientific Inference in Qualitative Research, Princeton: Princeton University Press.Google Scholar
- McCleary, Rachel M (1995) Dictating Democracy: Guatemala and the End of Violent Revolution, Gainesville: University Press of Florida.Google Scholar
- Morris, Stephen and Hyun Song Shin (1998) ‘Unique Equilibrium in a Model of Self-fulfilling Currency Attacks’, American Economic Review 88(3): 587–97.Google Scholar
- Nelson, Joan M., ed. (1990) ‘The Politics of Adjustment in Small Democracies: Costa Rica, the Dominican Republic, and Jamaica’, in Economic Crisis and Policy Choice, New York: Princeton University Press.Google Scholar
- Obstfeld, Maurice (1986) ‘Rational and Self-Fulfilling Balance-of-Payment Crisis’, American Economic Review 76(1): 72–81.Google Scholar
- Obstfeld, Maurice (1994) ‘The Logic of Currency Crises’, Cahiers économiques et monétaires 43(1): 189–213.Google Scholar
- Rogoff, Kenneth (1990) ‘Equilibrium Political Budget Cycles’, American Economic Review 80(1): 21–36.Google Scholar
- Simmons, Beth and Jens Heinmueller (2005) ‘Can Domestic Institutions Explain Exchange Rate Regime Choice?’, Unpublished manuscript, Harvard University.Google Scholar
- Weyland, Kurt (2002) The Politics of Market Reform in Fragile Democracies: Argentina, Brazil, Peru, and Venezuela, Princeton: Princeton University Press.Google Scholar
- World Bank (2011) ‘World Development Indicator 2011’, http://data.worldbank.org/data-catalog/world-development-indicators (accessed 4 April, 2016).