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Political Instability and Economic Vulnerability

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  • Bussiere, Matthieu
  • Mulder, Christian

Abstract

This paper analyzes and tests the influence of political instability on economic vulnerability in the context of the 1994 and 1997 crisis episodes. It constructs four political variables that aim at quantifying political instability. The paper finds that, for countries with weak economic fundamentals and low reserves, political instability has a strong impact on economic vulnerability. The estimation results suggest that including political variables in economic models does improve their power to explain and predict economic crises. The paper concludes that countries are more economically vulnerable during, and especially following, election periods, and when election results are less stable than at other times. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.

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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 5 (2000)
Issue (Month): 4 (October)
Pages: 309-30

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Handle: RePEc:ijf:ijfiec:v:5:y:2000:i:4:p:309-30

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  1. Sebastian Edwards & Julio A. Santaella, 1992. "Devaluation Controversies in the Developing Countries: Lessons From the Bretton Woods Era," NBER Working Papers 4047, National Bureau of Economic Research, Inc.
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  7. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
  8. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
  9. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 169-90, April.
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  11. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
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