Does Political Instability Lead to Higher and More Volatile Inflation? A Panel Data Analysis

  • Ari Aisen International Monetary Fund
  • Francisco José Veiga University of Minho, NIPE, Portugal

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.


Key words: Inflation, Volatility, Political instability, Institutions.
JEL: E31, E63.

How to Cite
Aisen A., & Veiga F.J. (2007). Does Political Instability Lead to Higher and More Volatile Inflation? A Panel Data Analysis. Panoeconomicus, 54(1), 5-27. doi:10.2298/PAN0701005A
Section
Original scientific paper