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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 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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