SR-SCP: The Arbitrage Lobby: Theory and Evidence on the Political Economy of Dual Exchange Rates

Dorothy Kronick, University of Pennsylvannia
Friday, January 27, 2017 - 12:00pm to 1:30pm
Gowen 1A

Abstract: Why do governments choose unsustainable macroeconomic policies? In this paper, we consider the political logic of maintaining dual, widely divergent exchange rates. Governments often advertise this policy as a consumption subsidy, since the overvalued, official exchange rate is used for imports. But the policy can instead be used to distribute arbitrage rents to importers. We present a model of the government’s tradeoff between these two constituencies (consumers vs. arbitrageurs). We then estimate the parameters of the model with an original firm-level data set from Venezuela, where, between 2003 and 2012, the government used dual exchange rates to subsidize approximately 215 billion dollars of imports at a fiscal cost of more than 100 billion. We find that the government rationed access to official-rate currency as if it valued importers nearly as much as consumers. Together with qualitative evidence, we interpret these findings as evidence that importers provided the government with essential political support.

Bio: Dorothy Kronick is an Assistant Professor of Political Science at the University of Pennsylvania. She completed her PhD at Stanford University in 2016. Prior to beginning graduate work at Stanford, Dorothy lived in Caracas, Venezuela as a Fulbright Scholar. Her research focuses on the political economy of Latin America.

 

UW Ph.D student Kevin Aslett will serve as the discussant.