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How does Political Violence Affect Currency Substitution? Evidence from Egypt

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  • David Fielding

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  • Anja Shortland

Abstract

In this paper we estimate a time-series model of the financial asset portfolio shares in Egypt, distinguishing between assets of varying degrees of liquidity and between domestic currency and foreign currency deposits. While financial liberalization and financial stability are found to have encouraged domestic residents to increase the share of their portfolio composed of domestic currency assets, these effects have been offset by an increase in the number of violent political incidents arising from conflict between radical Islamic groups and the Egyptian state. Greater violence has led to lower domestic asset demand and substitution into foreign currency deposits. The link between political events and financial outcomes provides a rationale for economic policy interventions by Bretton Woods institutions in response to increases in political instability.

Suggested Citation

  • David Fielding & Anja Shortland, 2002. "How does Political Violence Affect Currency Substitution? Evidence from Egypt," Discussion Papers in Economics 02/6, Department of Economics, University of Leicester.
  • Handle: RePEc:lec:leecon:02/6
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    File URL: http://www.le.ac.uk/economics/research/RePEc/lec/leecon/econ02-6.pdf
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    Cited by:

    1. Anja Shortland, 2004. "The Role of Politics and Institutions in LDC Currency Devaluations," Discussion Papers in Economics 04/30, Department of Economics, University of Leicester.
    2. David Fielding & Anja Shortland, 2005. "Political Violence and Excess Liquidity in Egypt," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 542-557.

    More about this item

    Keywords

    Egypt; Currency Substitution; Asset Demand; Political Violence; Radical Islamism;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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