Exchange Rate Volatility and Democratization in Emerging Market Countries

We examine some of the consequences of financial globalization for democratization in emerging market economies by focusing on the currency markets of four Asian countries at different stages of democratic development. Using political data of various kinds-including a new events data series-and the...

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Bibliographic Details
Published in:International studies quarterly 2003-06, Vol.47 (2), p.203-228
Main Authors: Hays, Jude C., Freeman, John R., Nesseth, Hans
Format: Article
Language:English
Subjects:
Currency
Currency markets
Democracy
Democratization
Economic models
Economic uncertainty
Emerging markets
Exchange Rate
Exchange rates
Foreign exchange rates
Foreign policy
Globalization
Indonesia
International capital market
International relations
Market Economy
Philippines
Political Development
Political elections
Political science
Rumors
South Korea
Thailand
Transition economies
Volatility
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Summary:We examine some of the consequences of financial globalization for democratization in emerging market economies by focusing on the currency markets of four Asian countries at different stages of democratic development. Using political data of various kinds-including a new events data series-and the Markov regime switching model from empirical macroeconomics, we show that in young and incipient democracies politics continuously causes changes in the probability of experiencing two different currency market equilibria: a high volatility "contagion" regime and a low volatility "fundamentals" regime. The kind of political events that affect currency market equilibration varies cross-nationally depending on the degree to which the polity of a country is democratic and its policymaking transparent. The results help us better gauge how and the extent to which democratization is compatible with financial globalization.
ISSN:0020-8833
1468-2478
DOI:10.1111/1468-2478.4702003