Political Conditions and Currency Crises: Empirical Regularities in Emerging Markets

Abstract

This paper demonstrates the impact of structural political conditions on the likelihood of currency crises in emerging markets. Controlling for a standard and parsimonious set of macroeconomic variables, I find that: left-wing government is more conducive to currency crises; democracies are less vulnerable; and strong governments (those with larger legislative majorities and those which face more fragmented legislative opposition) are also less vulnerable. In contrast to previous studies, I also find elections (and executive change not to be associated with currency crises. Despite the strong statistical association between currency crises and these political variables, in- and out-of-sample predictions demonstrate the remaining difficulty of predicting the timing of currency crises.