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Does Political Instability Lead to Higher Inflation? A+L2990 Panel Data Analysis

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  • Ari Aisen
  • Francisco José Veiga

Abstract

Economists generally accept the proposition that high inflation rates generate inefficiencies that reduce society''s welfare and economic growth. However, determining the causes of the worldwide diversity of inflationary experiences is an important challenge not yet satisfactorily confronted by the profession. Based on a dataset covering around 100 countries for the period 1960-99 and using modern panel data econometric techniques to control for endogeneity, this paper shows that a higher degree of political instability is associated with higher inflation. The paper also draws relevant policy implications for the optimal design of inflation-stabilization programs and of the institutions favorable to price stability.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/49.

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Length: 15
Date of creation: 01 Mar 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/49

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Related research

Keywords: Economic conditions; Economic models; inflation; inflation rate; monetary fund; high inflation; inflation rates; inflation tax; annual inflation; monetary policy; price stability; lower inflation; money growth; costs of inflation; inflation across countries; central bank; low inflation; price level; monetary policies;

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References

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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  2. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  3. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
  4. Carlos A. Végh, 1989. "Government Spending and Inflationary Finance: A Public Finance Approach," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 657-677, September.
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Citations

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Cited by:
  1. Bernardin Akitoby & Thomas Stratmann, 2006. "Fiscal Policy and Financial Markets," IMF Working Papers 06/16, International Monetary Fund.
  2. Martina Alexová, 2012. "Inflation drivers in new EU members," Working and Discussion Papers WP 6/2012, Research Department, National Bank of Slovakia.
  3. David Fielding, 2008. "Inflation Volatility and Economic Development: Evidence from Nigeria," Working Papers 0807, University of Otago, Department of Economics, revised Sep 2008.
  4. Sona Benecka & Tomas Holub & Narcisa Liliana Kadlcakova & Ivana Kubicova, 2012. "Does Central Bank Financial Strength Matter for Inflation? An Empirical Analysis," Working Papers 2012/03, Czech National Bank, Research Department.
  5. Thomas Stratmann & Bernardin Akitoby, 2009. "The Value of Institutions for Financial Markets," IMF Working Papers 09/27, International Monetary Fund.
  6. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: Cross-country evidence," Economics Papers 2005-W14, Economics Group, Nuffield College, University of Oxford.
  7. Khan, Safdar Ullah & Saqib, Omar Farooq, 2008. "Political Instability and Inflation in Pakistan," MPRA Paper 13056, University Library of Munich, Germany, revised 02 Jan 2009.
  8. Bernardin Akitoby & Thomas Stratmann, 2010. "The value of institutions for financial markets: evidence from emerging markets," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 146(4), pages 781-797, December.
  9. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflaton volatility: Cross-country evidence," Economics Series Working Papers 2005-W14, University of Oxford, Department of Economics.
  10. Harald Badinger, 2008. "Globalization,the Output-Inflation Tradeoff, and Inflation," FIW Working Paper series 010, FIW.
  11. David Fielding, 2010. "Non-monetary Determinants of Inflation Volatility: Evidence from Nigeria," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 19(1), pages 111-139, January.

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