What Determines Long-Run Macroeconomic Stability? Democratic Institutions

52 Pages Posted: 9 Feb 2006

See all articles by Arvind Subramanian

Arvind Subramanian

International Monetary Fund (IMF); Center for Global Development

Shanker Satyanath

New York University (NYU) - Wilf Family Department of Politics

Date Written: November 2004

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: Macroeconomic instability, political institutions, openness, conflict

JEL Classification: E31, E61, E63

Suggested Citation

Subramanian, Arvind and Satyanath, Shanker, What Determines Long-Run Macroeconomic Stability? Democratic Institutions (November 2004). IMF Working Paper No. 04/215, Available at SSRN: https://ssrn.com/abstract=879040

Arvind Subramanian (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Center for Global Development

2055 L St. NW
5th floor
Washington, DC 20036
United States

Shanker Satyanath

New York University (NYU) - Wilf Family Department of Politics ( email )

715 Broadway
New York, NY 10003
United States

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