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Democratization and real exchange rates

By Benjamin Furlan, Martin G\ue4chter, Bob Krebs and 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

Topics: C21, C23, F02, F31, F59, N20, ddc:330, Real exchange rates, democratization, difference-in-differencesestimator, matching estimators
Publisher: Vienna: FIW - Research Centre International Economics
Year: 2013
OAI identifier: oai:econstor.eu:10419/121129
Provided by: EconStor

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