Inflation and Democracy in Former Extractive Colonies Analysis with a New Instrumental Variable

Abdoul Mijiyawa

No 28, Proceedings of the German Development Economics Conference, Zurich 2008 from Verein für Socialpolitik, Research Committee Development Economics

Abstract: This paper analyzes the link between inflation and democracy in developing countries. In order to address the endogeneity issue of democracy, I use the date of political independence as an instrument for democratic institutions. The application of the criterion of Stock and Yogo (2002, 2005) for weak instrumental variable in my sample reveals that, the independence date is a good instrument for democratic institutions. Using five years pooled data covering the period 1960-2003, and a sample of 62 developing countries former extractive colonies (including 32 African countries); I find a robust positive causal relationship between inflation and democracy. It appears that democracy increases inflation because democracy stimulates money creation and compromises trade liberalization in my sample of developing countries. Case studies based on Chile, Ghana, and Sri Lanka better illustrate the result relating to the relationship between inflation and democracy in my sample.

Keywords: Democracy; Inflation; Median voter; Stabilization Policies; Weak Instruments Test (search for similar items in EconPapers)
JEL-codes: D78 E31 E63 O17 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (1)

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