What Determines Long-Run Macroeconomic Stability? Democratic Institutions

By Arvind Subramanian, Shanker Satyanath

November 1, 2004

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Arvind Subramanian, and Shanker Satyanath. What Determines Long-Run Macroeconomic Stability? Democratic Institutions, (USA: International Monetary Fund, 2004) accessed December 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We examine the deep determinants of long-run macroeconomic stability in a cross-country framework. We find that conflict, openness, and democratic political institutions have a strong and statistically significant causal impact on macroeconomic stability. Surprisingly the most robust relationship of the three is for democratic institutions. A one standard deviation increase in democracy can reduce nominal instability nearly fourfold. This impact is robust to alternative measures of democracy, samples, covariates, and definitions of conflict. It is particularly noteworthy that a variety of nominal pathologies discussed in the recent macroeconomic literature, such as procyclical policy, original sin, and debt intolerance, have common origins in weak democratic institutions. We also find evidence that democratic institutions both strongly influence monetary policy and have a strong, independent positive effect on stability after controlling for various policy variables.

Subject: Econometric analysis, Estimation techniques, Exchange rates, Foreign exchange, Income inequality, Inflation, Multiple currency practices, National accounts, Prices

Keywords: Africa, Central bank, Conflict, Democracy rating, Dependent variable, Estimation techniques, Exchange rates, Income inequality, Inflation, Inflation country, Least squares, Macroeconomic instability, Multiple currency practices, Openness, Political institutions, Political system, Public goods, Sub-Saharan Africa, Time series, WP

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/215
Stock No:

WPIEA2152004
ISBN:

9781451875072
ISSN:

1018-5941

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