The African Business Review May-Jun 2014 | Page 30
The aim of our model is to show that democracy affects negatively
inflation and to evaluate the explanatory weight of democracy in
the presence of proxy variables of economic policies. Variables
(MONgrowth) and (InRES) represent these proxy.
Other control variables are used. It comes to annual
percentage growth rate of GDP[11] (Growth), with the assertion
that the increase in GDP growth rate, which corresponds to an
increase in productivity, will lead to price decrease, and imports
plus exports as a percentage of GDP[12] (Trade) to control for
trade openness.
These two variables were used as control variables by Desai,
Ologsfard and Yousef (2002) in a study similar to ours, but the
goal was to demonstrate that the impact of democracy on inflation
remains conditioned by the degree of income inequality.
Empirical strategy
the period 1996-2012. The sample of countries covering this first
estimation is heterogeneous, containing developed, developing
and poor countries.
The economic relationship we are interested in identifying is:
INFit = α + β1 (DEM)it + β2 (POLSTAB)it + β3 (MONgrowth)
it + β4 (LnRES)it + β5 (Growth)it + β6 (Trade)it + εit (1)
Where (εi) is the random error term. In a first step we have run a
Haussman specification test on whether fixed or random effects
are more convenient to our data’s.
The Haussman statistic is:
H= (β^FE - β^RE)’ [ Var (β^FE) - Var (β^RE)] (β^FE - β^RE) ~ 2x(k)
The first estimation we carried out covers 124 countries and for
The Haussman specification test is based on the following corps
11
12
Annual percentage growth rate of GDP at market prices based on constant local
currency. Aggregates are based on constant 2005 U.S. dollars. Source: World Bank
national accounts data, and OECD National Accounts data files.
30 | The African Business Review
The sum of exports and imports of goods and services measured as a share of gross
domestic product. Source: World Bank national accounts data, and OECD National
Accounts data files.