Political Instability, Political Weakness and Inflation: An Empirical Analysis

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In this paper we analyze empirically the most important implications of two family political economy models of inflation: the "myopic? government approach and the "weak" government approach. In myopic government models inflation is the deliberate outcome of politicians strategic behavior, while in weak government models inflation is the unavoidable result of a political struggle between different factions. In testing the implications of these two models we use a new data set on political developments in 76 countries for the period 1971-1982. Using a number of alternative definitions of the inflation tax we find out that the data supports the implications of the myopic governments models; countries with a more unstable political environment tend to rely more heavily on the inflation tax. There is no evidence in favor of the weak government hypothesis.

Published: Sims, A.C. (Ed.) Advances In Econometrics, 2(0), 1994.

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