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Democratization and Real Exchange Rates

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Listed:
  • Benjamin Furlan
  • Martin Gächter
  • Bob Krebs
  • Harald Oberhofer

Abstract

This paper empirically assesses how democratization affects real exchange rates. By doing this, we combine so far separated strands of the economic literature and argue that democratization reduces currency undervaluation leading to a real exchange rate appreciation. We test this hypothesis empirically for a sample of countries observed from 1980 to 2007 by combining a difference-in-difference (DID) approach with propensity score matching (PSM) estimators. Our results reveal a strong and significant finding: democratization causes real exchange rates to appreciate. Consequently, the ongoing process of democratization observed in a few Arabic and Moslem countries is likely to reduce exchange rate distortions.
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  • Benjamin Furlan & Martin Gächter & Bob Krebs & Harald Oberhofer, 2016. "Democratization and Real Exchange Rates," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(2), pages 216-242, May.
    • Handle: RePEc:bla:scotjp:v:63:y:2016:i:2:p:216-242
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    File URL: http://hdl.handle.net/10.1111/sjpe.12088
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    1. Mohsen Bahmani-Oskooee & Thouraya Hadj Amor & Ridha Nouira & Christophe Rault, 2019. "Political Risk and Real Exchange Rate: What Can We Learn from Recent Developments in Panel Data Econometrics for Emerging and Developing Countries?," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(4), pages 741-762, December.

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    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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