Government Ideology, Democracy and the Sacrifice Ratio: Evidence from Latin American and Caribbean Disinflations

Abstract

Abstract:This study uses a sample of 34 disinflations undertaken by thirteen Latin American and Caribbean (LAC) nations to test if political institutions impact the cost of policy induced disinflations. We find, after controlling for several of the most important covariates in the literature, that disinflations are less costly for right vs left governments and that sacrifice ratios are lower for more democratic vs authoritarian governmental regimes. This is robust to different measures of government ideology as well as to alternative ways of computing the sacrifice ratio and lends support for political economy literature which argues that political institutions have significant macroeconomic effects.

Inflation targeting and disinflation costs in Emerging Market economies

“…Additional peculiarity is the relation between Party and the sacrifice ratio, which remains negative, but now it is statistically significant across Table 3. Therefore, for the sub-sample covering the recent period we are able to provide evidence that disinflation costs in EMEs are lower under right-wing governments, which is consistent with the findings by Caporale and Caporale (2008) and Caporale (2011). Note that the statistical significance of Party in the post-1990s period partly reflects the profound political changes within our sample.…”

“…For OECD countries, the empirical studies generally confirm that the faster the disinflation process, the lower the output costs, i.e., credible disinflations are associated with smaller output losses (Ball 1994, Boschen and Weiss 2001, Diana and Sidiropoulos 2004, Daniels et al 2005, Zhang 2005, Hofstetter 2008, Daniels and VanHoose 2009and 2013, Gonçalves and Carvalho 2009, Mazumder 2014, Roux and Hofstetter 2014, and Katayama et al 2019). On the other hand, Andersen and Wascher (1999) show that speed of disinflation does not matter in OECD countries; Mazumder (2014) confirm this conclusion for non-OECD countries; Gonçalves and Carvalho (2008) obtain similar results for both developed and developing countries;; while Caporale (2011) finds that the speed of disinflation may, in fact, increase sacrifice ratios.…”

“…Later on, most of the empirical literature has basically followed the Ball's approach in measuring the sacrifice ratio. The non-exhaustive list of studies incudes: Chortareas et al 2003, Temple 2002, Brumm and Krashevski 2003, Down 2004, Diana and Sidiropoulos 2004, Daniels et al 2005, Daniels and VanHoose 2013, Caporale and Caporale 2008, Hofstetter 2008, Senda and Smith 2008, Caporale 2011, Mazumder 2014, and Roux and Hofstetter 2014).…”

“…Indeed, Durham (2001), Brito (2010) and Roux and Hofstetter (2014) provide empirical evidence that supports this proposition for the developed countries, though Durham (2001) and Mazumder (2014) find opposite results for the developing economies. Finally, following Caporale and Caporale (2008) and Caporale (2011), in order to control for the effects of political factors, we include a dummy variable (Party), which takes three values: zero if the government is controlled by left-wing parties, one in case of a centrist government, and two for right-wing parties. As right-wing governments are known to be inflation-averse, the expected coefficient in front of this variable is negative.…”