Wednesday, February 25, 2009

Monetary Policy as Counter-Insurgency Strategy

. Wednesday, February 25, 2009

Via Blattman, here's the abstract of a new NBER working paper [pdf]:

Between 2004 and 2009, Iraq’s currency experienced a massive real appreciation, driven by both nominal exchange rate appreciation and high inflation. The forces driving this appreciation include the end of economic sanctions, the rally in oil prices, and the influx of US aid. During the same period, a number of insurgent groups confronted the Iraqi government. While once posing a formidable threat to Allied forces, the insurgents now seem to be in a terminal decline.

In this essay, we argue that the real appreciation of Iraq’s currency may have played an important role in weakening the various insurgent movements. Many of these organizations were heavily dependent on foreign funding, and the appreciation eroded the purchasing power of their foreign funds. This may have forced insurgents to turn to forms of domestic financing that are inherently inferior for two reasons. The first is that the collection of local “taxes” by insurgents would reduce their popularity. The second is that local collection of revenue increases the autonomy of local insurgent commanders at the expense of central command authorities.
Correlation doesn't equal causation, of course, but it's certainly an interesting thesis.


Monetary Policy as Counter-Insurgency Strategy
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