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The Political Economy of Nominal Macroeconomic Pathologies

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  • Arvind Subramanian

    ()
    (Peterson Institute for International Economics, USA; Center for Global Development, USA; Johns Hopkins University, USA)

  • Shanker Satyanath

    ()
    (New York University, USA)

Abstract

Recognizing that inflation and the macroeconomic policies that affect it can emanate from distributional conflicts in society, we examine the deep determinants of several nominal pathologies and related policy variables from a distributional perspective. We develop new instruments and use wellestablished existing instruments for these deep determinants and find that two deep determinantssocietal divisions and democratic institutionshave a powerful and robust causal impact on nominal macroeconomic outcomes. Surprisingly, given the widespread attention accorded to the effects of populist democracy on inflation, democracy robustly serves to reduce inflation over the long term. A one standard deviation increase in democracy reduces inflation nearly fourfold. A similar increase in societal divisions increases inflation more than twofold. Our results are robust to alternative measures of democracy,samples, covariates, and definitions of societal division. It is particularly noteworthy that a variety of nominal pathologies and their proximate policy causes discussed in the recent macroeconomic literature, such as procyclical policy, absence of central bank independence, original sin, and debt intolerance, have common origins in societal divisions and undemocratic political institutions.

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Bibliographic Info

Article provided by Savez ekonomista Vojvodine, Novi Sad, Serbia in its journal Panoeconomicus.

Volume (Year): 55 (2008)
Issue (Month): 1 (March)
Pages: 3-37

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Handle: RePEc:voj:journl:v:55:y:2008:i:1:p:3-37

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Web page: http://www.panoeconomicus.rs/

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Keywords: Democracy; Income inequality; Nominal macroeconomic outcomes;

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Cited by:
  1. Mohamed Fenira, 2014. "Democracy: A Determinant Factor in Reducing Inflation," International Journal of Economics and Financial Issues, Econjournals, vol. 4(2), pages 363-375.
  2. Berger, Daniel & Corvalan, Alejandro & Easterly, William & Satyanath, Shanker, 2013. "Do superpower interventions have short and long term consequences for democracy?," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 22-34.

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