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Does Political Instability lead to higher and more volatile inflation? A Panel Data Analysis

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Economists generally accept the proposition that high and volatile inflation rates generate inefficiencies that reduce society’s welfare. Furthermore, studies have shown that inflation is harmful to 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 broad dataset covering over 100 countries for the period 1975-1997 and using dynamic and static panel data econometric techniques, this paper shows that a higher degree of political instability is associated with both higher inflation levels and volatility. Not only does this paper advance the political economy literature establishing a relationship between inflation moments and political instability, but it also has important policy implications regarding the optimal design of inflation stabilization programs and of the institutions favorable to price stability.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 10/2003.

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Date of creation: 2003
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Handle: RePEc:nip:nipewp:10/2003

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Keywords: Inflation; volatility; political instability; institutions.;

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  1. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
  2. Jose Veiga, Francisco, 1999. "What causes the failure of inflation stabilization plans?," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 169-194, February.
  3. Aizenman, Joshua, 1992. "Competitive Externalities and the Optimal Seigniorage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 61-71, February.
  4. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  5. 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.
  6. Stanley Fischer & Ratna Sahay & Carlos A. Vegh, 2002. "Modern Hyper- and High Inflations," NBER Working Papers 8930, National Bureau of Economic Research, Inc.
  7. Nannestad, Peter & Paldam, Martin, 1994. " The VP-Function: A Survey of the Literature on Vote and Popularity Functions after 25 Years," Public Choice, Springer, vol. 79(3-4), pages 213-45, June.
  8. Alberto Alesina & Guido Tabellini, 1988. "Voting on the Budget Deficit," NBER Working Papers 2759, National Bureau of Economic Research, Inc.
  9. Francisco José Veiga, 2000. "Delays of Inflation Stabilizations," Economics and Politics, Wiley Blackwell, vol. 12(3), pages 275-295, November.
  10. 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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Cited by:
  1. Khani Hoolari, Seyed Morteza & Abounoori, Abbas Ali & Mohammadi, Teymour, 2014. "The Effect of Governance and Political Instability Determinants on Inflation in Iran," MPRA Paper 55827, University Library of Munich, Germany, revised Mar 2014.
  2. Arreaza Coll, Adriana & Pedauga, Luis Enrique, 2007. "Instituciones, estructura económica y política económica: ¿Qué hay detrás de la inflación en América Latina?," MPRA Paper 14325, University Library of Munich, Germany.
  3. Roy, Ripon & Rahman, Md. Mokhlesur, 2014. "An empirical analysis of remittance – inflation relationship in Bangladesh: post-floating exchange rate scenario," MPRA Paper 55190, University Library of Munich, Germany.
  4. Stefan Krause & Fabio Mendez, 2005. "Institutions, Arrangements, and Preferences for Inflation Stability: Evidence and Lessons from a Panel Data Analysis," Emory Economics 0501, Department of Economics, Emory University (Atlanta).

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