Socio-Political Instability and Growth Dynamics

Since 2006, almost 60 percent of global protest events have been exclusively driven by economic injustice. Standard determinants of socio-political instability reported in the literature, do not fully explain the effect of monetary and fiscal policy decisions on the intended target audience of those policy outcomes. We develop an overlapping generation’s monetary endogenous growth model characterized by socio-political instability, to analyse growth dynamics and specifically, monetary policy outcomes in the presence of this augmentation. Socio-political instability is specified as the fraction of output being lost due to strikes, riots and protests and is positively related to inflation. Interesting, two distinct growth dynamics emerge, one convergent and the other divergent, if socio-political instability is a function of inflation. And by using a sample of 170 countries during the 1980 – 2012 period, and allowing for time and fixed effects, the results indicate that inflation correlates positively with socio-political instability. Policy makers should be cognisant that it is crucial to maintain long-run price stability, as failure to do so may result in high inflation emanating from excessive money supply growth, and high (er) socio-political instability, and ultimately, the economy being on a divergent balanced growth path.