What Determines Long-Run Macroeconomic Stability? Democratic Institutions

Arvind Subramanian and Shanker Satyanath

No 2004/215, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; central bank; time series; public goods; dependent variable; Macroeconomic instability; political institutions; openness; conflict; political system; inflation country; democracy rating; least squares; Income inequality; Estimation techniques; Inflation; Multiple currency practices; Exchange rates; Sub-Saharan Africa; Africa (search for similar items in EconPapers)
Pages: 52
Date: 2004-11-01
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Citations: View citations in EconPapers (37)

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