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Democracy and policy stability

Pushan Dutt and Ahmed Mobarak ()

International Review of Economics & Finance, 2016, vol. 42, issue C, 499-517

Abstract: We explain stable growth performance in democracies by characterizing political systems in terms of the distribution of political power across groups, and show when the qualities of policy alternatives are uncertain, greater democracy (decentralization of authority) leads to more stable policy choices. We empirically test this mechanism by creating measures of the inter-temporal variability in fiscal and trade policies. In an array of specifications (cross-sectional, panel with fixed-effects, matching models, instrumental variables, difference-in-difference), we show that policy choices are significantly more stable over time in democracies. This mechanism explains a large part of the negative link between democracy and output volatility.

Keywords: Democracy; Policy volatility; Output volatility (search for similar items in EconPapers)
JEL-codes: D72 P16 O23 O24 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.iref.2015.10.024

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