Fighting Inflation in Developing Countries: Does Democracy Help? An Empirical Investigation

Using the date of independence as an instrument for democratic institutions, and data over the period 1960–2003, I find a positive and significant effect of democracy on inflation in a sample of 62 developing countries. Democracy increases inflation because democracy stimulates money creation and compromises trade liberalisation. When I exclude Latin American countries from my sample, democracy has a positive but insignificant effect on inflation. This suggests that the significant effect of democracy is due to Latin American countries experiences. Thus, my results reconcile two views: one that ‘populist democracy’ is a Latin American phenomenon; and the other that democracy does not necessarily induce better macroeconomic management in developing countries. Copyright © 2010 John Wiley & Sons, Ltd.