Governance structure affects real exchange rates in oil-exporting countries

Institutional and political characteristics affect the extent to which the real exchange rates of oil-exporting countries co-move with the oil price. In a simple theoretical model, good governance insulates real exchange rates from price volatility by generating a smoother pattern of fiscal spending over the resource price cycle. Empirical tests on a panel of 33 oil-exporting countries provide evidence that countries with high bureaucratic quality, strong and impartial legal systems, democratic governing systems, and more equal income distributions have real exchange rates which co-move less with the oil price.