Coups d'état and the foreign exchange market

I empirically examine the effect of coups d'état on the foreign exchange market using a monthly panel dataset covering 150 countries over the period 1980–2015. Specifically, I investigate whether foreign exchange market's participants sanction a country following a coup d'état event b...

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Bibliographic Details
Published in:World economy 2020-07, Vol.43 (7), p.1928-1950
Main Author: Balima, Hippolyte Weneyam
Format: Article
Language:English
Subjects:
Comparative studies
Coups d'etat
coups d'état
Currency
currency crises
Currency instability
Depreciation
Economic analysis
Flexibility
Foreign exchange
foreign exchange market
Foreign exchange markets
Foreign exchange rates
Markets
Money
Multiracial people
Trading
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Summary:I empirically examine the effect of coups d'état on the foreign exchange market using a monthly panel dataset covering 150 countries over the period 1980–2015. Specifically, I investigate whether foreign exchange market's participants sanction a country following a coup d'état event by allowing depreciations of its national currency against a weighted basket of currencies of its trading partners. I combine different identification strategies and find that the occurrence of a coup d'état induces a depreciation of the nominal effective exchange rate in the coup d'état country and generates negative spillover effects on neighbouring countries. Once a coup occurs, a country level of financial buffers and the flexibility of its exchange rate regime allow reducing the magnitude of the depreciation. In addition, I provide evidence that coups also increase the likelihood of experiencing a currency crisis by about 2 percentage points in coup d'état countries compared to non‐coup d'état countries.
ISSN:0378-5920
1467-9701
DOI:10.1111/twec.12905