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Democratization and real exchange rates

  • Furlan, Benjamin

    ()

    (University of Salzburg)

  • Gächter, Martin

    ()

    (Foreign Research Division, Oesterreichische Nationalbank)

  • Krebs, Bob

    ()

    (Economics and Research Department, Banque centrale du Luxembourg)

  • Oberhofer, Harald

    ()

    (University of Salzburg)

This paper empirically assesses how democratization affects real exchange rates. Specifically, in line with the democratic peace theory we argue that democratization reduces currency undervaluation, and thus, might bring misalignments in foreign exchange markets to an end. We test this hypothesis for a sample of countries observed from 1980 to 2007. Econometrically, we combine a difference-in-difference (DID) approach with propensity score matching estimators. Our estimation results reveal that democratization causes real exchange rates to appreciate, lending empirical support to the democratic peace theory in this specific economic context.

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Paper provided by University of Salzburg in its series Working Papers in Economics and Finance with number 2012-6.

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Length: 28 pages
Date of creation: 01 Jul 2012
Date of revision: 28 Oct 2013
Handle: RePEc:ris:sbgwpe:2012_006
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  9. José Cheibub & Jennifer Gandhi & James Vreeland, 2010. "Democracy and dictatorship revisited," Public Choice, Springer, vol. 143(1), pages 67-101, April.
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  17. Mansfield, Edward D. & Milner, Helen V. & Rosendorff, B. Peter, 2002. "Why Democracies Cooperate More: Electoral Control and International Trade Agreements," International Organization, Cambridge University Press, vol. 56(03), pages 477-513, June.
  18. Jeffrey Smith & Petra Todd, 2003. "Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20035, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  19. Sarno, Lucio & Taylor, Mark P, 2001. "Purchasing Power Parity and the Real Exchange Rate," CEPR Discussion Papers 2913, C.E.P.R. Discussion Papers.
  20. Jensen, Nathan M., 2003. "Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment," International Organization, Cambridge University Press, vol. 57(03), pages 587-616, June.
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  22. Papaioannou, Elias & Siourounis, Gregorios, 2008. "Economic and Social Factors Driving the Third Wave of Democratization," CEPR Discussion Papers 6986, C.E.P.R. Discussion Papers.
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  25. David H. Bearce & Mark Hallerberg, 2011. "Democracy And De Facto Exchange Rate Regimes," Economics and Politics, Wiley Blackwell, vol. 23(2), pages 172-194, 07.
  26. Yu, Miaojie, 2010. "Trade, democracy, and the gravity equation," Journal of Development Economics, Elsevier, vol. 91(2), pages 289-300, March.
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