Currency and Conflict

According to Lebanon’s Daily Star:

Traders across Syria reported widely fluctuating rates and two currency dealers in Damascus, where the pound appeared to be hit hardest, said it fell below 200 to the dollar for the first time in what one described as panic buying of the U.S. currency.

On Monday evening the pound traded at 205 to the dollar, down 20 percent in four days and 77 percent down since the start of the anti-Assad uprising in March 2011 when it was at 47.

The idea of examining currency prices over the course of a conflict is interesting. There are a number of confounders of course. For instance, the regime can often intervene in certain ways to affect the value of currency. Other incidents besides the conflict itself can also drive currency fluctuations, especially when the conflict is relatively minor.

One nice case (from strictly a research perspective) is the US Civil War, when both the Union and Confederacy issued their own notes. Jeffrey Arnold‘s project, “Pricing the Costly Lottery: Financial Market Reactions to Battlefield Events in the American Civil War,” leverages this fact to see how markets responded to successes and failures of either side. We discussed this project before when it was presented as a poster at PolMeth 2012, and Jeffrey’s website now has his MPSA 2013 slides.

Here’s his abstract, and one of my favorite graphs:

What role does combat play in resolving the disagreement that initiated war? Bargaining theories of war propose two mechanisms, the destruction of capabilities and the revelation of private information. These mechanisms are difficult to analyze quantitatively because the mechanisms are observationally equivalent, the participants’ expectations are unobservable, and there is a lack of data on battles. With new methods and new data on the American Civil War, I address these challenges. I estimate the information revealed by combat with a model of Bayesian learning. I use prices of Union and Cnnnonfederate currencies to measure public expectations of war duration and outcome. Data on battlefield events come from detailed data on the outcomes and casualties of the battles of the American Civil War. The results suggest that battle outcomes rather than casualties or information revelation had the largest influence on the expected duration of the American Civil War.

confederate-union-prices

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