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Politics, Inflation, and the Mundell-Tobin Effect

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  • Edwards, Jeffrey A.

Abstract

This paper addresses the possibility of a correlation between inflation and investment for countries with inflation below 20%. The existing literature typically finds no correlation below this level of inflation. By instrumenting with an extensive set of political stability and regime variables I have shown that within a lower range of inflation rates, between 5% and 9%, this correlation is positive, highly significant, and shows no signs of reverse causality.

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File URL: http://mpra.ub.uni-muenchen.de/36443/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36443.

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Date of creation: 2006
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Handle: RePEc:pra:mprapa:36443

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Keywords: Politics; Inflation; Investment; Mundell; Tobin;

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  1. Cukierman, Alex & Kalaitzidakis, Pantelis & Summers, Lawrence H. & Webb, Steven B., 1993. "Central bank independence, growth, investment, and real rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 95-140, December.
  2. Shaghil Ahmed & John H. Rogers, 1998. "Inflation and the great ratios: long-term evidence from the U.S," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 628, Board of Governors of the Federal Reserve System (U.S.).
  3. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
  4. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 71, pages 280.
  5. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo Group Munich.
  6. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262522543, December.
  7. Davis, George & Kanago, Bryce, 1996. "On Measuring the Effect of Inflation Uncertainty on Real GNP Growth," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 163-75, January.
  8. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195060119, October.
  9. Allen, Stuart D, 1986. "The Federal Reserve and the Electoral Cycle: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(1), pages 88-94, February.
  10. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  11. Banaian, King & Luksetich, William A, 2001. "Central Bank Independence, Economic Freedom, and Inflation Rates," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 39(1), pages 149-61, January.
  12. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, Elsevier, vol. 14(4), pages 517-533, August.
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