Explaining policy volatility in developing countries

This paper studies the causes of policy volatility in developing countries during 1970-1999. To construct composite policy volatility indicators, the paper applies a robust principal components analysis to Washington Consensus policy variables. The results suggest three dimensions of policy volatility: fiscal, macroeconomic and development policies. The paper shows that more stable macroeconomic policy is associated with higher income growth, before turning to the determinants of volatility. Using a Bayesian approach which addresses the model uncertainty problem, the paper finds that macroeconomic policy is more volatile in countries that adopt a presidential system, have weaker political constraints, where government stability is lower, and that are former British colonies. Adopting a parliamentary regime helps to stabilize policy.