Political Ideology, Exchange Rate and State History

ABSTRACT Through the variation of exploitation in ideological distance between U.S. investors and foreign governments and the combination of investor‐level ideology measures proposed by Kempf et al. with foreign‐party ideology extracted from electoral manifesto data from 2000 to 2018 of 23 different nations, the study explores how changes in political ideology impact domestic currency values relative to the U.S. dollar. The findings show that an increase in ideological distance following elections is associated with a statistically significant 2% appreciation of the domestic currency against the U.S. dollar, which can be interpreted as causal. The potential mechanism operates through country origin and state‐history legacies, which capture differences in institutional quality.