Coups d'etat and the foreign exchange market

I empirically examine the effect of coups d'etat on the foreign exchange market using a monthly panel dataset covering 150 countries over the period 1980-2015. Specifically, I investigate whether foreign exchange market's participants sanction a country following a coup d'etat event by allowing depreciations of its national currency against a weighted basket of currencies of its trading partners. I combine different identification strategies and find that the occurrence of a coup d'etat induces a depreciation of the nominal effective exchange rate in the coup d'etat country and generates negative spillover effects on neighbouring countries. Once a coup occurs, a country level of financial buffers and the flexibility of its exchange rate regime allow reducing the magnitude of the depreciation. In addition, I provide evidence that coups also increase the likelihood of experiencing a currency crisis by about 2 percentage points in coup d'etat countries compared to non-coup d'etat countries.