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

  • Ari Aisen
  • Francisco José Veiga

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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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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  1. 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.
  2. 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.
  3. 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.
  4. 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.
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