Political shock triggers currency chaos, draining reserves and destabilizing markets.
The article examines how political uncertainty affects foreign exchange markets in a country with two different markets for currency. It finds that for exchange rates to stabilize, the return on investment must be higher than the depreciation rate of the domestic currency in the official market. The study also shows that having low official reserves makes it harder to stabilize exchange rates after a shock, and during capital outflows, the informal market exchange rate can exceed the equilibrium rate depending on the central bank's reserves.