Inflation and the Structure of Economic and Political Systems

Abstract

Theories of inflation emphasize different aspects of economic and political structure as the root causes of inflation. We reexamine these root causes, including two aspects of economic structure that have received no or little analysis in this context: the natural resource sector and the shadow economy. Using a large panel data set and a more extensive set of explanatory variables, our main findings are that higher inflation is associated with an increase in the size of the natural resource sector, the shadow economy, greater political instability, and less democratic political systems. These results also hold for subsamples of developing countries. The consistency in finding that the natural resource sector and shadow economy are determinants of inflation suggest that these aspects of economic structure should receive increased attention in assessing the causes of inflation, along with the usual focus on political structure.