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Democratization and Real Exchange Rates

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

Abstract

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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  • Benjamin Furlan & Martin Gächter & Bob Krebs & Harald Oberhofer, 2016. "Democratization and Real Exchange Rates," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(2), pages 216-242, May.
    • Handle: RePEc:bla:scotjp:v:63:y:2016:i:2:p:216-242
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    File URL: http://hdl.handle.net/10.1111/sjpe.12088
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    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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