The influence of political opponent imprisonment on exchange rate movements

This paper explores how politically motivated imprisonments of opposition figures affect exchange-rate movements in emerging economies. While much of the existing research treats political shocks as events that occur outside the economic system, this study argues that they are part of it – endogenous signals that shape how investors interpret macroeconomic fundamentals. Drawing on signalling theory and the idea of institutional uncertainty, the paper explains how political actions that weaken judicial independence and legal credibility increase perceived risk and reduce policy coherence. Using a Bayesian Structural Time Series (BSTS) approach, the analysis estimates the impact of these imprisonments in Turkey, Malaysia, and Brazil, comparing actual exchange-rate paths with synthetic counterfactuals. Across all three countries, the results show a clear pattern of currency depreciation and rising volatility following such events. These findings suggest that when institutional trust erodes, the consequences reach well beyond politics – directly into financial stability.