Inflation and Democracy in Former Extractive Colonies Analysis with a New Instrumental Variable
AbstractThis paper analyzes the link between inflation and democracy in developing countries. In order to address the endogeneity issue of democracy, I use the date of political independence as an instrument for democratic institutions. The application of the criterion of Stock and Yogo (2002, 2005) for weak instrumental variable in my sample reveals that, the independence date is a good instrument for democratic institutions. Using five years pooled data covering the period 1960-2003, and a sample of 62 developing countries former extractive colonies (including 32 African countries); I find a robust positive causal relationship between inflation and democracy. It appears that democracy increases inflation because democracy stimulates money creation and compromises trade liberalization in my sample of developing countries. Case studies based on Chile, Ghana, and Sri Lanka better illustrate the result relating to the relationship between inflation and democracy in my sample. --
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Bibliographic InfoPaper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Zurich 2008 with number 28.
Date of creation: 2008
Date of revision:
Democracy; Inflation; Median voter; Stabilization Policies; Weak Instruments Test;
Find related papers by JEL classification:
- D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
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