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Political Instability, Political Weakness and Inflation: An Empirical Analysis

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  • Sebastian Edwards
  • Guido Tabellini

Abstract

In this paper we analyze empirically the most important implications of two family political economy models of inflation: the "myopic? government approach and the "weak" government approach. In myopic government models inflation is the deliberate outcome of politicians strategic behavior, while in weak government models inflation is the unavoidable result of a political struggle between different factions. In testing the implications of these two models we use a new data set on political developments in 76 countries for the period 1971-1982. Using a number of alternative definitions of the inflation tax we find out that the data supports the implications of the myopic governments models; countries with a more unstable political environment tend to rely more heavily on the inflation tax. There is no evidence in favor of the weak government hypothesis.

Suggested Citation

  • Sebastian Edwards & Guido Tabellini, 1991. "Political Instability, Political Weakness and Inflation: An Empirical Analysis," NBER Working Papers 3721, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3721
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    1. Magnus Blomstrom & Irving B. Kravis & Robert E. Lipsey, 1988. "Multinational Firms and Manufactured Exports from Developing Countries," NBER Working Papers 2493, National Bureau of Economic Research, Inc.
    2. Drazen, Allan & Grilli, Vittorio, 1993. "The Benefit of Crises for Economic Reforms," American Economic Review, American Economic Association, vol. 83(3), pages 598-607, June.
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    Cited by:

    1. Albanesi, Stefania, 2007. "Inflation and inequality," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1088-1114, May.
    2. Jean-Claude Berthélemy & Jean-Paul Azam & Stéphane Calipel & Claude Jessua, 1996. "Risque politique et croissance en Afrique," Revue Économique, Programme National Persée, vol. 47(3), pages 819-829.
    3. Christopher Crowe, 2004. "Inflation, Inequality and Social Conflict," CEP Discussion Papers dp0657, Centre for Economic Performance, LSE.
    4. James L. Butkiewicz & Halit Yanikkaya, 2007. "Time-Consistent Polities and Growth in Developing Countries: An Empirical Analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(2), pages 306-323, July.
    5. Federico Sturzenegger & Mariano Tommasi, 1992. ""Deadlock" Societies, The Allocation of Time and Growth Performance," UCLA Economics Working Papers 660, UCLA Department of Economics.
    6. Bertoni, Fabio & Lugo, Stefano, 2014. "The effect of sovereign wealth funds on the credit risk of their portfolio companies," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 21-35.
    7. Saffar, Walid, 2014. "The political economy of share issue privatization: International evidence," Journal of Multinational Financial Management, Elsevier, vol. 24(C), pages 1-18.
    8. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June.
    9. Crowe, Christopher, 2004. "Inflation, inequality and social conflict," LSE Research Online Documents on Economics 19932, London School of Economics and Political Science, LSE Library.
    10. Fabrizio Carmignani, 2003. "Political Instability, Uncertainty and Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 1-54, February.
    11. Janvier Nkurunziza, 2004. "How long can inflation tax compensate for the loss Wof government revenue in war economics? Evidence from Burundi," Economics Series Working Papers WPS/2004-19, University of Oxford, Department of Economics.
    12. Sebastian Edwards, 1996. "Public Sector Deficits and Macroeconomic Stability in Developing Countries," NBER Working Papers 5407, National Bureau of Economic Research, Inc.
    13. James L.Butkiewicz & Halit Yanikkaya, 2004. "Sociopolitical Instability and Long Run Economic Growth: a Cross Country Empirical Investigation," Working Papers 04-04, University of Delaware, Department of Economics.
    14. Alesina, Alberto, 1992. "Political models of macroeconomic policy and fiscal reform," Policy Research Working Paper Series 970, The World Bank.
    15. Janvier Nkurunziza, 2004. "How Long Can Inflation Tax Compensate For The Loss Of Government Revenue In War Economies? Evidence From Burundi," Development and Comp Systems 0409065, EconWPA.
    16. Chwieroth, Jeffrey & Walter, Andrew, 2015. "Great expectations, veto players, and the changing politics of banking crises," LSE Research Online Documents on Economics 60953, London School of Economics and Political Science, LSE Library.
    17. Funkhouser, Edward, 1997. "Labor market adjustment to political conflict Changes in the labor market in El Salvador during the 1980s," Journal of Development Economics, Elsevier, vol. 52(1), pages 31-64, February.
    18. 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.
    19. Jean-Claude Nachega, 2005. "Fiscal Dominance and Inflation in the Democratic Republic of the Congo," IMF Working Papers 05/221, International Monetary Fund.
    20. Sebastian Edwards, 1995. "Why are Saving Rates so Different Across Countries?: An International Comparative Analysis," NBER Working Papers 5097, National Bureau of Economic Research, Inc.

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