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Civil Conflicts and Exchange Rate Misalignment: Evidence from MENA and Arab League Members

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  • Lemaire Thibault

    (International Monetary Fund, Washington, D.C., USA)

Abstract

For more than a decade, civil conflicts intensity has been high in the Middle East and North Africa, yet the monetary and financial impacts of such episodes have received relatively little attention. Using macroeconomic and conflict panel data for Arab League members, Iran and Turkey during the period 1970–2018, this paper constructs a country-specific real exchange rate misalignment index and adopts an instrumental variable approach to show that civil conflicts lead to real exchange rate overvaluations in the region: a 1 unit increase in civil conflict intensity leads to a 0.24 unit increase in the RER misalignment index. The results suggest that upward pressures on the real exchange rate, such as inflation resulting from physical capital and output loss, dominate. Economic policy during post-conflict transitions should mitigate this effect by incorporating a strategy to realign the currency.

Suggested Citation

  • Lemaire Thibault, 2023. "Civil Conflicts and Exchange Rate Misalignment: Evidence from MENA and Arab League Members," Review of Middle East Economics and Finance, De Gruyter, vol. 19(2), pages 101-130, August.
    • Handle: RePEc:bpj:rmeecf:v:19:y:2023:i:2:p:101-130:n:3
    DOI: 10.1515/rmeef-2022-0001
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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