Jorge M. Streb

Elections and the timing of devaluations

This paper presents a rational political budget cycle model for an open economy, in which devaluations are delayed in the pre-election period so as to increase the electoral chances of the party in office. By concentrating on closed economies, previous political cycle models had overlooked the influence of elections on the behavior of exchange rates. Voter uncertainty is introduced in two different dimensions. Not only are voters uncertain regarding the competency of the incumbent, but tey also ignore the degree to which the incumbent is opportunistic.

Political Stabilization Cycles in High Inflation Economies

High inflation economies often do not exhibit smooth inflationary processes, but rather stop-go cycles. This paper relates these stop-go episodes of inflation to a political cycle. The government can try to repress inflation until after the elections in order to increase the chances of being reelected. It is modeled as a two-period game of incomplete information where voters try to pick the most competent government, and inflation can be lowered by the government in the short run through foreign debt accumulation. Several stabilization episodes in Latin America, such as the Primavera Plan in Argentina and the Cruzado and Real Plans in Brazil, are used to illustrate the model.

Checks and Balances on Political Budget Cycles: Cross-Country Evidence

Previous empirical work on political budget cycles (PBCs) implicitly assumes the executive has full discretion over fiscal policy. Instead, we ask what happens when legislative checks and balances limit executive discretion. We find that legislative checks and balances moderate PBCs in countries with high compliance with the law. More effective checks and balances help to explain why cycles are weaker in developed countries and in established democracies. When the discretional component of executive power is isolated, there are significant cycles in all democracies.

Elections and the Timing of Devaluations

This paper presents a rational political budget cycle model for an open economy, in which devaluations are delayed in the pre-election period so as to increase the electoral chances of the party in office. By concentrating on closed economies, previous political cycle models had overlooked the influence of elections on the behavior of exchange rates. Voter uncertainty is introduced in two different dimensions. Not only are voters uncertain regarding the competency of the incumbent, but tey also ignore the degree to which the incumbent is opportunistic.

REAL EXCHANGE RATE CYCLES AROUND ELECTIONS

We develop the implications of devaluation cycles for real exchange rates in a two-sector small open economy with a cash-in-advance constraint. Policy-makers are office-motivated politicians. Voters have incomplete information on the competence and the opportunism of incumbents. Devaluation acts like a tax, and is politically costly because it can signal the government is incompetent. This provides incumbents an incentive to postpone devaluations, and can lead to an overvalued exchange rate before elections. We compare the implied cycle of appreciated/depreciated exchange rates with empirical evidence around elections from Latin America.

Discretional Political Budget Cycles and Separation of Powers

In contrast to previous empirical work on electoral cycles, which implicitly assumes the executive has full discretion over fiscal policy, this paper contends that under separation of powers an unaligned legislature may have a moderating role. Focusing on the budget surplus, we find that stronger effective checks and balances explain why cycles are weaker in developed and established democracies. Once the discretional component of executive power is isolated, there are significant cycles in all democracies. Whether the political system is presidential or parliamentary, or the electoral rules are majoritarian or proportional, does not change the basic results.

Bank Relationships: Effect on the Availability and Marginal Cost of Credit for Firms in Argentina

The paper provides evidence on what affects at the margin the cost and availability of bank credit for firms in Argentina. We study in particular how banks use different pieces of private and public information to screen firms and overcome informational asymmetries in the credit market. Some private information is transferable, like balance sheet data. Private information generated in relationships is not. To capture the closeness of bank relationships, we resort to the concentration of bank credit and the number of credit lines in a bank. We also consider public information available in the Central de Deudores. The cost of credit is measured using overdrafts, the most expensive line of credit, at the bank that charges the highest rate for overdrafts. We find that the cost of credit is smaller for a firm with a close relationship to the marginal bank. Firms with large assets, a high sales/assets ratio, and a low debt/assets ratio pay a lower interest rate at the margin. A good credit history (no debt arrears and no bounced checks) and collateral also reduce the marginal interest rate. The availability of credit is measured by unused credit lines as a proportion of total liabilities with the main bank. The availability of credit depends positively on a close relationship with the main bank. Large assets, a high return over assets, a high sales/assets ratio, a low debt/assets ratio, a good credit history, and collateral lead to higher credit availability. Our measure of unused credit lines is less ambiguous than traditional measures like leverage, which may indicate financial distress rather than availability of credit.

Determinants of the Development of Corporate Bond Markets in Argentina: One Size Does Not Fit All

Conventional theory leads to expect bonds to be a financing vehicle for large firms because of economies of scale and contracting costs. We find both in our econometric evidence for firms quoted on Latin American stock exchanges, and in our survey results for Argentina, that size of assets is a robust determinant of the use of bond finance. This result, together with the fact that there are few firms that are large in terms of market value, can help understand why Argentina, as well as Latin America, has small bond markets in terms of the ratio of the stock of bonds to GDP. Since firm value represents the present value of the cash flows against which the firm borrows, the outstanding stock of corporate bonds is as small as the size of Argentine firms.

Party alignment and political budget cycles: the Argentine provinces

The links between subnational political budget cycles (PBCs) and the national government in federal countries have seldom been studied. We study the behavior of the budget balance, public expenditures, and revenues in Argentine provinces during the 1985–2001 period. We find that in election years public expenditures increase, but revenues also do — a result exactly contrary to the predictions of rational opportunistic models of aggregate PBCs — and the budget deficit does not increase significantly. Since the increase in provincial revenues is due to larger federal transfers, we incorporate the influence of party alignment between governors and president. Public expenditures in election years increase in aligned provinces because of larger federal transfers, without affecting the budget deficit; in contrast, the budget deficit tends to increase in unaligned provinces. The federal government thus plays a key role in subnational PBCs, with an electoral cycle in the allocation of federal transfers.

Loan and Bond Finance in Argentina, 1985-2005

Loan and bond finance during 1985-2005 can be divided into three sub-periods. After the 1982 debt crisis, which mainly involved domestic and foreign bank loans to both the corporate and government sectors, there was practically no credit. This situation of lack of credit persisted until the domestic economy was stabilized in 1991 with the Convertibility Plan, and foreign debt renegotiation was completed in 1993 with the Brady Plan. Loan finance recovered to unprecedented levels since the 1950s, and bond finance became for the first time an important financing vehicle for both the national government and large firms in the corporate sector. Credit came to a sudden stop in 2001, with widespread default on both corporate and government bonds. The 2001 debt crisis was not followed by runaway domestic inflation, and by 2005 Argentina was able to return to foreign capital markets.