POLITICAL AND INSTITUTIONAL DETERMINANTS OF INFLATION IN DEVELOPING COUNTRIES

Abstract

High inflation is one of the main macroeconomic imbalances, which is caused by economic, structural, political and institutional factors. The purpose of this study is to empirically reveal the effect of political and institutional factors on inflation in developing countries.  For this purpose, the data of 40 developing countries for the period 2003-2019 are analyzed within the framework of dynamic panel data approach. The findings of the system GMM estimator used in the study show that the Worldwide Governance Indicators (WGI), which represents political and institutional factors, have negative effects on inflation. In addition, different indicators that measure political and institutional phenomena such Economic Freedom of the World Index (EFW) and Index of Economic Freedom (IEF) are used to check the reliability of these results. The findings show that the effect of alternative indicators on inflation is similar to the effect of WGI indicators. The results of this study emphasize the importance of institutional quality in ensuring price stability. In this context, the main policy recommendation of the study is the necessity of establishing strong institutions in order to reduce inflation and ensure a sustainable price stability.