Domestic political determinants of inflation

Abstract

Abstract. Political economists have advanced a variety of diverse and competing hypotheses to explain the domestic political dimension of inflation. With few exceptions, however, these hypotheses have been tested individually without regard to competing explanations. This study uses pooled time‐series data on fifteen industrial democracies to examine five prominent political hypotheses that purport to explain either political pressures that cause inflation or institutional arrangements that insulate governments from these pressures. The results indicate that: (1) Central Bank independence provides an effective counterweight to inflation by insulating monetary policy making from inflationary (particularly, partisan) impulses; (2) Government spending increases caused by distributive and redistributive politics intensify inflationary pressures even in countries with independent Central Banks and neocorporatist arrangements; (3) Inflation is determined partially by the ideology of the party controlling government. Leftist governments in pursuit of income redistribution produce higher inflation than conservative governments; (4) Elections do not have significant effects on inflation under any structural circumstances; and (5) Neocorporatism does not consistently reduce inflation or contain the inflationary effects of partisan manipulation and fiscal expansion. However, neocorporatism may stop inflation if wage moderation by labour is accompanied by the government's commitment to pursue restrictive monetary policy.