Does political instability lead to higher and more volatile inflation?: A panel data analysis

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.Ekonomisti u osnovi prihvataju cinjenicu da visoke i promenljive stope inflacije dovode do neefikasnosti koja smanjuje blagostanje drustva. Nadalje studije su pokazale da je inflacija stetna po ekonomski rast. Medjutim utvrdjivanje uzroka svetske raznolikosti inflacionih iskustava predstavlja vazan izazov sa kojim se struka jos uvek nije suocila na zadovoljavajuci nacin. Na osnovu sirokog skupa podataka koji obuhvata preko 100 zemalja u periodu 1975-1997. i koristeci ekonometrijske tehnike dinamicnih i statickih panel podataka, ovaj rad pokazuje da je stepen politicke nestabilnosti povezan kako sa visim tako i sa promenljivim nivoima inflacije. Ovaj rad ne samo da unapredjuje literaturu politicke ekonomije, utvrdjujuci odnos izmedju momenata inflacije i politicke nestabilnosti, vec ima i vazne implikacije po politiku sto se tice osmisljavanja optimalnih programa stabilizacije inflacije i institucija koje povoljno deluju na stabilnost cena.