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Does Political Instability lead to higher and more volatile inflation? A Panel Data Analysis

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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.

Suggested Citation

  • Ari Aisen & Francisco José Veiga, 2003. "Does Political Instability lead to higher and more volatile inflation? A Panel Data Analysis," NIPE Working Papers 10/2003, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:10/2003
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    References listed on IDEAS

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    1. Francisco José Veiga, 2000. "Delays of Inflation Stabilizations," Economics and Politics, Wiley Blackwell, vol. 12(3), pages 275-295, November.
    2. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
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    9. 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.
    10. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    11. Mr. Stanley Fischer & Ms. Ratna Sahay & Mr. Carlos A. Végh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 2002/197, International Monetary Fund.
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    Cited by:

    1. Adriana Arreaza Coll & Luis Enrique Pedauga, 2007. "Instituciones, estructura económica y política económica: ¿qué hay detrás de la inflación en América Latina?," Monetaria, CEMLA, vol. 0(1), pages 7-48, enero-mar.
    2. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: Cross-country evidence," Economics Papers 2005-W14, Economics Group, Nuffield College, University of Oxford.
    3. 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.
    4. Adriana Arreaza Coll & Luis Enrique Pedauga, 2007. "Instituciones, estructura económica y política económica: ¿qué hay detrás de la inflación en América Latina?," Monetaria, CEMLA, vol. 0(1), pages 7-48, enero-mar.

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    More about this item

    Keywords

    Inflation; volatility; political instability; institutions.;
    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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