The effect of transparency on output volatility

Previous research has shown that democracies, on average, produce more stable output than non-democracies. In this paper, I argue that it is the political and economic transparency that arises out of democracies that leads to this relative stability in output growth, because the ability of a country to adjust and adapt to shocks, be they internal or external, is more pronounced in countries where the flows of information are better. Using data from 1980–2009, I show that once transparency is incorporated into the analysis democracy actually appears to increase volatility, whilst transparency is seen to have a significant dampening effect on volatility. This result is remarkably robust to the inclusion of many additional variables, alternative definitions of democracy and model specifications. Copyright Springer-Verlag Berlin Heidelberg 2014