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Democracy and policy stability

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  • Dutt, Pushan
  • Mobarak, Ahmed Mushfiq

Abstract

We explain stable growth performance in democracies by characterizing political systems in terms of the distribution of political power across groups, and show when the qualities of policy alternatives are uncertain, greater democracy (decentralization of authority) leads to more stable policy choices. We empirically test this mechanism by creating measures of the inter-temporal variability in fiscal and trade policies. In an array of specifications (cross-sectional, panel with fixed-effects, matching models, instrumental variables, difference-in-difference), we show that policy choices are significantly more stable over time in democracies. This mechanism explains a large part of the negative link between democracy and output volatility.

Suggested Citation

  • Dutt, Pushan & Mobarak, Ahmed Mushfiq, 2016. "Democracy and policy stability," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 499-517.
    • Handle: RePEc:eee:reveco:v:42:y:2016:i:c:p:499-517
    DOI: 10.1016/j.iref.2015.10.024
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    More about this item

    Keywords

    Democracy; Policy volatility; Output volatility;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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