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Does Political Instability Lead to Higher and More Volatile Inflation? A Panel Data Analysis

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  • Ari Aisen
  • Francisco José Veiga

Abstract

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. Key words: Inflation, Volatility, Political instability, Institutions.JEL: E31, E63.

Suggested Citation

  • Ari Aisen & Francisco José Veiga, 2007. "Does Political Instability Lead to Higher and More Volatile Inflation? A Panel Data Analysis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 54(1), pages 5-27.
    • Handle: RePEc:voj:journl:v:54:y:2007:i:1:p:5-27:id:266
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    More about this item

    Keywords

    Inflacija; Promenljivost; Politička nestabilnost; Institucije;
    All these keywords.

    JEL classification:

    • 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

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