CID Working Paper No. 79

Political Conditions and Currency Crises: Empirical Regularities in Emerging Markets

Steven A. Block

Revised March 2002

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.

Keywords: currency crises, politics, emerging markets

JEL codes: D72, F31, F32, O23

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