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How does Political Violence Affect Currency Substitution? Evidence from Egypt

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posted on 19.05.2009, 15:25 by David Fielding, Anja Shortland
In this paper we estimate a time-series model of the financial asset portfolio shares in Egypt, distinguishing between assets of varying degrees of liquidity and between domestic currency and foreign currency deposits. While financial liberalization and financial stability are found to have encouraged domestic residents to increase the share of their portfolio composed of domestic currency assets, these effects have been offset by an increase in the number of violent political incidents arising from conflict between radical Islamic groups and the Egyptian state. Greater violence has led to lower domestic asset demand and substitution into foreign currency deposits. The link between political events and financial outcomes provides a rationale for economic policy interventions by Bretton Woods institutions in response to increases in political instability.

History

Publisher

Dept. of Economics, University of Leicester

Available date

19/05/2009

Publisher version

http://www.le.ac.uk/economics/research/discussion/papers2002.html

Book series

Papers in Economics;02/6

Language

en