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Does political instability affect exchange rates in Arab Spring countries?

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Abstract

This paper investigates the dynamic relationship between political instability and exchange rates in five Arab Spring countries over the period 1992Q1-2016Q4. We include macroeconomic fundamentals to identify the transmission channels through which political instability may affect exchange rates. Based on VAR and ARDL models, our results report that political instability is associated with a significant drop in the value of domestic currencies of these countries. Economic growth is found to be the key mechanism channel. We find also that the dependence between variables is more emphasized in the short-run than in the long-run.

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... These geopolitical tensions, could seriously affect investors' confidence and undermine economic progress. A perennial concern is how these types of political uncertainties affect economic performance and financial markets (Bouraoui and Hammami, 2017). An assessment of this problem is thus a timely and sensible endeavour, given the lack of literature in this area. ...
... We formulate tests of the link between geopolitical risk (GPR) and exchange rates in the context ofempirical exchange rate modelsin the literature (Bouraoui and Hammami, 2017;Suleman, 2017;Bahmani-Oskooee et al, 2019;Abid and Rault, 2020;Manasse et al, 2020). The theoretical underpinning for the political risk and exchange rate nexus rests on the paper by Manasse et al (2020), who state that higher political risk triggers a depreciation of the domestic currency. ...
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Presentation
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