The relationship between political instability and economic growth in advanced economies: Empirical evidence from a panel VAR and a dynamic panel FE-IV analysis

Maximilian Dirks and Torsten Schmidt

No 1000, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This paper analyzes the relationship between political instability and economic growth in advanced economies. Using a panel of 34 advanced economies from 1996 to 2020, we first employ a panel VAR estimated via System GMM, which allows us to explore the endogenous relationship between economic growth and political instability and to identify potential transmission channels. Second, we use an instrumental variable approach that exploits variation in median temperature and spillover effects of political instability from culturally approximate countries to establish causality. The empirical results suggest that political instability reduces GDP by 4 to 7 % five years after the shock, mainly through lower investment and consumption. A one standard deviation increase in economic growth reduces political instability by half a standard deviation, five years after the shock.

Keywords: Political instability; economic growth; panel VAR; system GMM; Panel IV; local projection (search for similar items in EconPapers)
JEL-codes: C26 C33 O43 P16 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-gro and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:1000

DOI: 10.4419/96973166

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