Can the shadow economy undermine the effect of political stability on inflation? empirical evidence

Mazhar, U. & Jafri, J. (2017). Can the shadow economy undermine the effect of political stability on inflation? empirical evidence. Journal of Applied Economics, 20(2), pp. 395-420. doi: 10.1016/S1514-0326(17)30018-1

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Abstract

This paper revisits the empirical relationship between political stability and inflation while explicitly accounting for the presence of the shadow economy. Using a large data set of 122 countries over the 1999 to 2007 period, we find that the well established negative correlation between political stability and inflation holds only if the size of the shadow economy remains modest; and it ceases to exist at higher levels of the size of the informal sector. This finding contributes to the existing literature on public finance that assigns special importance to political determinants of inflation. The results are robust against alternative specifications and satisfy the usual assumptions of a valid statistical inference.

Item Type: Article
Additional Information: © 2017, Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Uncontrolled Keywords: political stability; informal sector or shadow economy; inflation; openness; tax revenue
Divisions: School of Social Sciences > Department of Sociology
URI: http://openaccess.city.ac.uk/id/eprint/18470

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