Political instability and budget deficits: an empirical analysis of developing countries in the long term

Abstract

It is unquestionable that economic growth is vital for developing countries, and research demonstrates that political instability and sustained budget deficits along with large, ongoing government borrowing can effectively disrupt economic progress (Ali, 2001; Aisen and Veiga, 2013; Clements, Bhattacharya and Nguyen, 2004). Current literature on the long-term relationship between political instability and budget deficits primarily focuses on developed countries, rather than developing nations. Existing research on developing countries tends to focus on short-term associations in individual countries. This study expands the literature by examining the long-term relationship between four different aspects of political instability and budget deficits specifically in 67 developing countries. I estimate a dynamic panel data model for five consecutive, non-overlapping, 5-year periods, from 1990 to 2014 using the Generalized Method of Moments (GMM) estimator of Blundell and Bond (1998). The results suggest that, over the long term, political instability does not have a statistically significant impact on budget deficits in developing countries.