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Inflation and Democracy in Former Extractive Colonies Analysis with a New Instrumental Variable


  • Mijiyawa, Abdoul


This paper analyzes the link between inflation and democracy in developing countries. In order to address the endogeneity issue of democracy, I use the date of political independence as an instrument for democratic institutions. The application of the criterion of Stock and Yogo (2002, 2005) for weak instrumental variable in my sample reveals that, the independence date is a good instrument for democratic institutions. Using five years pooled data covering the period 1960-2003, and a sample of 62 developing countries former extractive colonies (including 32 African countries); I find a robust positive causal relationship between inflation and democracy. It appears that democracy increases inflation because democracy stimulates money creation and compromises trade liberalization in my sample of developing countries. Case studies based on Chile, Ghana, and Sri Lanka better illustrate the result relating to the relationship between inflation and democracy in my sample.

Suggested Citation

  • Mijiyawa, Abdoul, 2008. "Inflation and Democracy in Former Extractive Colonies Analysis with a New Instrumental Variable," Proceedings of the German Development Economics Conference, Zurich 2008 28, Verein für Socialpolitik, Research Committee Development Economics.
  • Handle: RePEc:zbw:gdec08:28

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    References listed on IDEAS

    1. Steven A. Block & Karen E. Ferree & Smita Singh, 2003. "Multiparty Competition, Founding Elections and Political Business Cycles in Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(3), pages 444-468, September.
    2. Cukierman, Alex & Miller, Geoffrey P. & Neyapti, Bilin, 2002. "Central bank reform, liberalization and inflation in transition economies--an international perspective," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 237-264, March.
    3. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-398, September.
    4. Block, Steven A., 2002. "Political business cycles, democratization, and economic reform: the case of Africa," Journal of Development Economics, Elsevier, vol. 67(1), pages 205-228, February.
    5. Marta Campillo & Jeffrey A. Miron, 1997. "Why Does Inflation Differ across Countries?," NBER Chapters,in: Reducing Inflation: Motivation and Strategy, pages 335-362 National Bureau of Economic Research, Inc.
    6. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    7. Prakash Loungani & Phillip L Swagel, 2001. "Sources of Inflation in Developing Countries," IMF Working Papers 01/198, International Monetary Fund.
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    More about this item


    Democracy; Inflation; Median voter; Stabilization Policies; Weak Instruments Test;

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • 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
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements


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