Political stability and economic growth: the role of exchange rate regime

This paper aims to explore the relationship between political stability and economic growth with a focus on the role of exchange rate regime. We carried out ordinary least squares (OLS), Generalized least squares (GLS) and system generalized method of moments (GMM). We are based on a panel of 50 countries of which 21 are developed and 29 emerging over the period 1996-2013. We found that political stability is not very important in explaining economic growth, while exchange rate flexibility disrupts the economies of emerging countries and stimulates economic growth in developed countries. The results also show that political stability requires the choice of a flexible exchange rate regime and that exchange rate flexibility leads to political stability in order to stimulate economic growth in emerging countries. However, for developed countries, political stability accelerates economic growth if the exchange rate regime is not too flexible and exchange rate flexibility increases economic activity if the level of political stability is low. Our results show that the nature of exchange rate regime plays a crucial role in the decision to strengthen political and economic stability. The interaction term between political stability and the degree of exchange flexibility is statistically significant, confirming the importance of the theoretical and empirical foundations raised in this research.