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How does political violence affect confidence in a local currency? Evidence from Egypt

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  • David Fielding

    (University of Otago, Dunedin NZ and Centre for the Study of African Economies, University of Oxford, UK)

  • Anja Shortland

    (University of Leicester, UK)

Abstract

In this paper we estimate a time-series model of the financial asset portfolio shares in Egypt, distinguishing between assets of varying degrees of liquidity and between domestic currency and foreign currency deposits. While financial liberalization and financial stability are found to have encouraged domestic residents to increase the share of their portfolio composed of domestic currency assets, these effects have been offset by an increase in the number of violent political incidents arising from conflict between radical Islamic groups and the Egyptian state. Greater violence has led to lower domestic asset demand and substitution into foreign currency deposits. The link between political events and financial outcomes provides a rationale for economic policy interventions by Bretton Woods institutions in response to increases in political instability. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • David Fielding & Anja Shortland, 2005. "How does political violence affect confidence in a local currency? Evidence from Egypt," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(7), pages 841-866.
    • Handle: RePEc:wly:jintdv:v:17:y:2005:i:7:p:841-866
    DOI: 10.1002/jid.1182
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    References listed on IDEAS

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