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

25 Pages Posted: 21 Feb 2019

See all articles by Mohsen Bahmani‐Oskooee

Mohsen Bahmani‐Oskooee

University of Wisconsin - Milwaukee - Center for Research on International Economics

Thouraya Hadj Amor

University of Shaqra; University of Monastir

Ridha Nouira

University of Monastir

Christophe Rault

University of Orleans; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2019

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 to 2016 period. Based on the recently developed method of Cross- Sectionally Augmented ARDL approach of Chudik and Pesaran (2015b), and the panel threshold estimation of Chudik et al. (2017) our main findings are the following: i) 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, ii) 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. iii) 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.

Keywords: real exchange rate, political instability, institutional quality, cross-sectionally augmented ARDL, threshold effects, emerging and developing countries

JEL Classification: C210, D730, F310, P480

Suggested Citation

Bahmani-Oskooee, Mohsen and Amor, Thouraya Hadj and Nouira, Ridha and Rault, Christophe, Political Risk and Real Exchange Rate: What Can We Learn from Recent Developments in Panel Data Econometrics for Emerging and Developing Countries? (2019). CESifo Working Paper No. 7443, Available at SSRN: https://ssrn.com/abstract=3338797

Mohsen Bahmani-Oskooee (Contact Author)

University of Wisconsin - Milwaukee - Center for Research on International Economics ( email )

3210 N. Maryland Avenue, Bolton Hall 802
Bolton Hall 802
Milwaukee, WI 53211
United States

Thouraya Hadj Amor

University of Shaqra ( email )

main street
king saud
Shagra, 11911
Saudi Arabia

University of Monastir ( email )

Mounastir, 4100
Tunisia

Ridha Nouira

University of Monastir ( email )

Mounastir, 4100
Tunisia

Christophe Rault

University of Orleans ( email )

Rue de Blois
BP 6739
LEO, Orleans, Orleans cedex 2 45067
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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