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Political Risk and Real Exchange Rate: What Can We Learn from Recent Developments in Panel Data Econometrics for Emerging and Developing Countries?

Author

Listed:
  • Mohsen Bahmani-Oskooee
  • Thouraya Hadj Amor
  • Ridha Nouira
  • Christophe Rault

    (LEO - Laboratoire d'Économie d'Orleans [FRE2014] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper focuses on the analysis of the long-run response of the real exchange rate (RER) to political risks and tests whether non-economic variables have an impact on RER in 31 emerging and developing countries. We use annual data from the International Country Risk Guide database over the 1984–2016 period. Based on the recently developed method of cross-sectionally augmented ARDL approach of Chudik and Pesaran (J Econ 188:393–420, 2015b), and the panel threshold estimation of Chudik et al. (Rev Econ Stat 99(1):135–150, 2017) our main findings are the following: (1) countries experiencing a high degree of corruption, a high risk to investment, or a high degree of political instability tend to experience a real exchange rate depreciation, (2) there exists strong evidence for a threshold effect on the relationship between investment profile-RER, corruption-RER and political instability-RER. Specifically, political instability and corruption adversely affect real exchange rate especially when they exceed the threshold. (3) The effects of bureaucracy, law, and order seem to be statistically insignificant on the RER. Our findings are robust to the inclusion of the Balassa–Samuelson effect in the estimated equations.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Mohsen Bahmani-Oskooee & Thouraya Hadj Amor & Ridha Nouira & Christophe Rault, 2019. "Political Risk and Real Exchange Rate: What Can We Learn from Recent Developments in Panel Data Econometrics for Emerging and Developing Countries?," Post-Print hal-03533036, HAL.
    • Handle: RePEc:hal:journl:hal-03533036
    DOI: 10.2139/ssrn.3338797
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    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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