Does political instability affect exchange rates in Arab Spring countries?

Abstract

This article 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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