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Democracy, Inequality, and Inflation

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  • DESAI, RAJ M.
  • OLOFSGÅRD, ANDERS
  • YOUSEF, TARIK M.

Abstract

Do democracies suffer higher inflation than nondemocracies? We identify two competing hypotheses regarding the impact of democracy on inflation. In the “populist” approach, inflation is the result of public demands for transfers financed by the inflation tax, suggesting that electoral competition will increase inflation. In the “state-capture” approach, inflation is a result of pressure from elites who derive private benefits from money creation, suggesting that electoral competition may constrain inflation. We present a simple model that captures both ideas and argue that the impact of democracy is conditioned by the prevailing level of income inequality. This claim is tested with data from more than 100 countries between 1960 and 1999 using different dynamic panel estimation methods to control for unobserved effects and the potential endogeneity of some independent variables. We find robust evidence that democracy is associated with lower inflation in lower-inequality countries but with higher inflation in higher-inequality countries.The authors thank Michael Bailey, Robert Cumby, Philip Keefer, Torsten Persson, Dennis Quinn, George Shambaugh, David Stasavage, and David Strömberg for comments on early drafts. The central bank turnover data used in this paper were generously provided by Jakob de Haan. Previous versions of this paper were delivered at the annual meetings of the Midwest Political Science Association and American Political Science Association. Financial support from the Edmund A. Walsh School of Foreign Service and research assistance from Jorge Ugaz and Mouneer Odeh are gratefully acknowledged.

Suggested Citation

  • Desai, Raj M. & Olofsgård, Anders & Yousef, Tarik M., 2003. "Democracy, Inequality, and Inflation," American Political Science Review, Cambridge University Press, vol. 97(3), pages 391-406, August.
    • Handle: RePEc:cup:apsrev:v:97:y:2003:i:03:p:391-406_00
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    1. Giavazzi, Francesco & Tabellini, Guido, 2005. "Economic and political liberalizations," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1297-1330, October.
    2. Benjamin Furlan & Martin Gächter & Bob Krebs & Harald Oberhofer, 2016. "Democratization and Real Exchange Rates," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(2), pages 216-242, May.
    3. Ilker Domaç & Eray M. Yücel, 2005. "What Triggers Inflation in Emerging Market Economies?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(1), pages 141-164, April.
    4. Dejene Mamo Bekana, 2016. "What Causes Inflation in a Post Communist Economy? Evidence from Ethiopia," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(61), pages 3-46, September.
    5. Jamal Bouoiyour & Refk Selmi, 2013. "The effects of central banks' independence on inflation outcomes in emerging countries: Does the choice of exchange regime matter?," Post-Print hal-01886584, HAL.
    6. Hyunwoo Kim, 2023. "The microfoundation of macroeconomic populism: The effects of economic inequality on public inflation aversion," Economics and Politics, Wiley Blackwell, vol. 35(1), pages 65-96, March.
    7. Rashid Sbia & Helmi Hamdi, 2020. "Remittances and inflation in OPEC countries:Evidence from bias-corrected least-squares dummy variable (CLSDV) estimator," Economics Bulletin, AccessEcon, vol. 40(3), pages 2471-2483.
    8. Mahmut Zeki Akarsu & Orkideh Gharehgozli, 2024. "Inequality and inflation relationship in middle-income countries," Journal of Computational Social Science, Springer, vol. 7(1), pages 995-1018, April.
    9. Paresh Kumar Narayan & Seema Narayan & Sagarika Mishra, 2011. "Do Remittances Induce Inflation? Fresh Evidence from Developing Countries," Southern Economic Journal, John Wiley & Sons, vol. 77(4), pages 914-933, April.
    10. Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.
    11. Christoph S. Weber, 2018. "Central bank transparency and inflation (volatility) – new evidence," International Economics and Economic Policy, Springer, vol. 15(1), pages 21-67, January.
    12. Garriga, Ana Carolina & Rodriguez, Cesar M., 2023. "Central bank independence and inflation volatility in developing countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1320-1341.
    13. Benczes, István & Szabó, Krisztina, 2023. "Társadalmi törésvonalak és gazdasági (ir)racionalitások. A közgazdaságtan szerepe és helye a populizmus kutatásában [Social cleavages and economic (ir)rationalities: The role of economics in populi," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 23-54.
    14. Mijiyawa, Abdoul, 2008. "Inflation and Democracy in Former Extractive Colonies Analysis with a New Instrumental Variable," Proceedings of the German Development Economics Conference, Zurich 2008 28, Verein für Socialpolitik, Research Committee Development Economics.
    15. Garriga, Ana Carolina & Rodriguez, Cesar M., 2020. "More effective than we thought: Central bank independence and inflation in developing countries," Economic Modelling, Elsevier, vol. 85(C), pages 87-105.
    16. Nordvik, Frode Martin, 2022. "Inflation news and the poor: The role of ethnic heterogeneity," World Development, Elsevier, vol. 151(C).
    17. Huo, Jingjing, 2015. "How Nations Innovate: The Political Economy of Technological Innovation in Affluent Capitalist Economies," OUP Catalogue, Oxford University Press, number 9780198735847.
    18. Arvind Subramanian & Shanker Satyanath, 2008. "The Political Economy of Nominal Macroeconomic Pathologies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(1), pages 3-37, March.
    19. Jamus Jerome Lim, 2021. "The limits of central bank independence for inflation performance," Public Choice, Springer, vol. 186(3), pages 309-335, March.
    20. David Dorn & Justina Fischer & Gebhard Kirchgässner & Alfonso Sousa-Poza, 2007. "Is It Culture or Democracy? The Impact of Democracy and Culture on Happiness," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 82(3), pages 505-526, July.
    21. Binder, Carola, 2019. "Inequality and the inflation tax," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    22. Desai, Raj M. & Olofsgard, Anders & Yousef, Tarik M., 2005. "Inflation and inequality: does political structure matter?," Economics Letters, Elsevier, vol. 87(1), pages 41-46, April.
    23. Manoel Bittencourt, 2012. "Democracy, populism and hyperinflation: some evidence from Latin America," Economics of Governance, Springer, vol. 13(4), pages 311-332, December.
    24. Koyama, Mark & Johnson, Blake, 2015. "Monetary stability and the rule of law," Journal of Financial Stability, Elsevier, vol. 17(C), pages 46-58.

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