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Political Instability, Inflation Tax and Asset Substitution in Burundi

Author

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  • Janvier D. Nkurunziza

    (United Nations Economic Commission for Africa)

Abstract

The paper shows that civil war in Burundi in the 1990s has provoked an unprecedented decline in government revenue. Both foreign aid transfers and revenue from domestic sources dried up, inducing the government to rely more on inflation tax. Using quarterly data covering the period from 1980:1 to 2002:4 to measure the sensitivity of money demand to inflation we find that the long-run semi-elasticity of inflation to real money in circulation trebled between the pre-war to the war period. The remarkable increase of the semi-elasticity reflects what is known in the literature as "flight from domestic currency," whereby domestic currency is substituted for less liquid assets. By shedding light on the behavior of the demand for real money amidst persistent political and economic instability, this paper illustrates the limits of inflation tax as a dependable source of government revenue.

Suggested Citation

  • Janvier D. Nkurunziza, 2005. "Political Instability, Inflation Tax and Asset Substitution in Burundi," Journal of African Development, African Finance and Economic Association (AFEA), vol. 7(1), pages 42-72.
    • Handle: RePEc:afe:journl:v:7:y:2005:i:1:p:42-72
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    Citations

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    Cited by:

    1. Jane Mpapalika & Christopher Malikane, 2019. "The Determinants of Sovereign Risk Premium in African Countries," JRFM, MDPI, vol. 12(1), pages 1-20, February.
    2. Vanessa van den Boogaard & Wilson Prichard & Nikola Milicic & Matthew Benson, 2016. "Tax revenue mobilization in conflict-affected developing countries," WIDER Working Paper Series 155, World Institute for Development Economic Research (UNU-WIDER).
    3. Janvier D. Nkurunziza & Léonce Ndikumana & Prime Nyamoya, 2012. "The Financial Sector in Burundi," NBER Working Papers 18289, National Bureau of Economic Research, Inc.
    4. Janvier D. Nkurunziza & Léonce Ndikumana & Prime Nyamoya, 2014. "The Financial Sector in Burundi: An Investigation of Its Efficiency in Resource Mobilization and Allocation," NBER Chapters, in: African Successes, Volume III: Modernization and Development, pages 103-156, National Bureau of Economic Research, Inc.
    5. repec:idq:ictduk:13659 is not listed on IDEAS
    6. Mutascu, Mihai & Tiwari, Aviral & Estrada, Fernando, 2011. "Taxation and political stability," MPRA Paper 36855, University Library of Munich, Germany, revised Feb 2012.
    7. Estrada, Fernando & Mutascu, Mihai & Tiwari, Aviral, 2011. "Estabilidad política y tributación [Taxation and political stability]," MPRA Paper 32414, University Library of Munich, Germany.
    8. Janvier D. Nkurunziza, 2010. "Why Is The Financial Sector In Burundi Not Development-Oriented?," EUI-RSCAS Working Papers 29, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    9. repec:idq:ictduk:13551 is not listed on IDEAS
    10. Vanessa van den Boogaard & Wilson Prichard & Nikola Milicic & Matthew Benson, 2016. "Tax revenue mobilization in conflict-affected developing countries," WIDER Working Paper Series wp-2016-155, World Institute for Development Economic Research (UNU-WIDER).
    11. Gadong Toma Dalyop, 2020. "Tax structure and political instability in Africa," International Journal of Economic Policy Studies, Springer, vol. 14(1), pages 77-121, February.
    12. Janvier D. Nkurunziza, 2010. "Why Is The Financial Sector In Burundi Not Development-Oriented?," RSCAS Working Papers 2010/29, European University Institute.
    13. Liu, Tie-Ying & Lee, Chien-Chiang, 2021. "Global convergence of inflation rates," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    14. Estrada, Fernando, 2013. "Estabilidad política y poder fiscal [political stability and tax power]," MPRA Paper 58458, University Library of Munich, Germany, revised 2014.

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