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.
This paper presents evidence on the political and economic determinants of social sector spending from a panel dataset. The principal finding is that democratization in countries, as measured by within-country variation in subjective indices of democracy, is a significant predictor of government spending on education and health. The relationship is robust to controlling for a variety of factors and the estimated magnitudes suggest that an increase from the lowest to the highest rating for democracy for a country is associated with approximately 1 percent more central government spending and 3 percent more general government spending in social sectors, as a percent of GDP.
Notes: bath scores have been converted to a scale of 0 to 1, with 1 representing the highest rating for democracy
Table 3 illustrates the same point in another way by presenting the transition probabilities for the pooled cross-section time series data on the PIV democracy measure. As seen, most of the weight in the matrix is on the diagonal: country democracyratings change quite infrequently. Table 4 presents non-parametric evidence on the bivariate relationship between changes in democracy index and changes in social sector spending. It identifies episodes
.3 log points. Take two countries such as Ghana and Honduras that have democracyratings of 2 and 5, respectively, which represent a difference of about 1.5 times the standard deviation. The results predict that because of this difference in institutions, Ghana will experience a depreciation of the currency that is about 6 times greater than that of Honduras. 26 And finally, a one standard deviation in the extent of inequality (about 7.9) will change the instability outcome by 0.4 log points.
In the remaining columns of Table 1a , the combination of instruments and
So far we have used Polity’s ( Marshall and Jaggers, 2002 ) measure of constraints on the executive (XCONST) as our measure of democracy. (Recall that this is the variable that drives Polity’s democracyrating.) We check for the robustness of our core result (in Table 1a , column 2) to alternative measures of democracy in Table 3 .
Robustness to Alternative Definitions of Political Institutions (Large Sample)
(Dependent variable is log of annual average percent change in nominal parallel exchange rate)
This paper investigates the determinants of exchange rate regime choice in 93 countries during 1990-98. Cross-country analysis of variations in international reserves and nominal exchange rates shows that (i) truly fixed pegs and independent floats differ significantly from other regimes and (ii) significant discrepancies exist between de jure and de facto flexibility. Regression results highlight the influence of political factors (political instability and government temptation to inflate), adequacy of reserves, dollarization (currency substitution), exchange rate risk exposure, and some traditional optimal currency area criteria, in particular capital mobility, on exchange rate regime selection.
than under a democratic (or multi-party) system because they are less politically accountable under the former system. 9 We considered initially three different indicators: a democracyrating by Freedom House, averaged over 1990-95, the number of government changes and the number of revolutions (irregular transfers of power), both averaged over 1990-93. 10 The frequency of government changes is however a questionable proxy for political instability, as government changes are not necessarily a sign of political instability. They can result from the normal
This issue features a timely paper by Vladimir Klyuev and Paul Mills on the role of personal wealth and home equity withdrawal in the decline in the U.S. saving rate. Lusine Lusinyan and Leo Bonato explain how work absence in 18 European countries affects labor supply and demand. And a paper by Paolo Manasse (University of Bologna) entitled "Deficit Limits and Fiscal Rules for Dummies" examines fiscal frameworks.