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Democratization and real exchange rates

Author

Listed:
  • Benjamin Furlan
  • Martin Gächter
  • Bob Krebs
  • Harald Oberhofer

Abstract

This paper empirically assesses how democratization affects real exchange rates. By doing this, we combine so far separated strands of the economic literature and argue that democratization reduces currency undervaluation leading to a real exchange rate appreciation. We test this hypothesis empirically for a sample of countries observed from 1980 to 2007 by combining a difference-in-difference (DID) approach with propensity score matching (PSM) estimators. Our results reveal a strong and significant finding: democratization causes real exchange rates to appreciate. Consequently, the ongoing process of democratization observed in a few Arabic and Moslem countries is likely to reduce exchange rate distortions.

Suggested Citation

  • Benjamin Furlan & Martin Gächter & Bob Krebs & Harald Oberhofer, 2013. "Democratization and real exchange rates," FIW Working Paper series 125, FIW.
    • Handle: RePEc:wsr:wpaper:y:2013:i:125
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    More about this item

    Keywords

    Real exchange rates; democratization; difference-in-differencesestimator; matching estimators;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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