The African Business Review May-Jun 2014 | Page 23

Democracy: a determinant factor in
reducing inflation
By Mohamed Fenira

The economic literature has often explained the causes of macroeconomic instability by purely
economic arguments. Monetary and fiscal policies have been considered as the exclusive tools for
ensuring macroeconomic stability and reducing inflation. The purpose of this paper is to extend
the range of explanatory factors in explaining macroeconomic pathologies and to demonstrate
that democracy is an important instrument in reducing inflation. The paper firstly provides a critical
analysis to the median voter theory, which claims the existence of a positive relationship between
democracy and inflation, by relating the Tunisian case study and then presents a literature review that
sustains our point of view. The paper finally develops an empirical study that measures the impact
of democracy on inflation under a heterogeneous sample of countries and a sample consisting only
of developing countries, for the period 1996-2012. The estimation results show that democracy is
statistically significant in reducing inflation in both samples.

The African Business Review | 23