Democratization and Real Exchange Rates

University of Salzburg Economics & Finance Working Paper No. 2012-06

29 Pages Posted: 8 Jul 2012 Last revised: 29 Oct 2013

See all articles by Benjamin Furlan

Benjamin Furlan

University of Salzburg - Department of Economics and Social Sciences

Martin Gächter

University of Innsbruck - Department of Economics & Statistics; Oesterreichische Nationalbank (OeNB), Foreign Research Division

Bob Krebs

Banque Centrale du Luxembourg

Harald Oberhofer

Vienna University of Economics and Business - Department of Economics; Austrian Institute of Economic Research (WIFO)

Multiple version iconThere are 2 versions of this paper

Date Written: July 7, 2012

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 democratisation observed in a few Arabic and Moslem countries is likely to reduce exchange rate distortions.

Keywords: Real exchange rates, democratization, difference-in-differences-estimator, matching estimators

JEL Classification: C21, C23, F02, F31, F59, N20

Suggested Citation

Furlan, Benjamin and Gächter, Martin and Krebs, Bob and Oberhofer, Harald, Democratization and Real Exchange Rates (July 7, 2012). University of Salzburg Economics & Finance Working Paper No. 2012-06. Available at SSRN: https://ssrn.com/abstract=2102067 or http://dx.doi.org/10.2139/ssrn.2102067

Benjamin Furlan

University of Salzburg - Department of Economics and Social Sciences ( email )

Residenzplatz 9
Salzburg, 5010
Austria

HOME PAGE: http://www.uni-salzburg.at/sowi/furlan

Martin Gächter

University of Innsbruck - Department of Economics & Statistics ( email )

Universitaetsstrasse 15/4
Innsbruck, 6020
Austria
+43 512 507 7164 (Phone)

HOME PAGE: http://www.uibk.ac.at

Oesterreichische Nationalbank (OeNB), Foreign Research Division ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Bob Krebs

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

HOME PAGE: http://www.bcl.lu

Harald Oberhofer (Contact Author)

Vienna University of Economics and Business - Department of Economics ( email )

Welthandelsplatz 1
A-1020 Vienna
Austria

Austrian Institute of Economic Research (WIFO) ( email )

P.O. Box 91
Wien, A-1103
Austria

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