Political polarization, budgetary rigidities and inflation
Keywords:
inflation, political economy, budget, public spendingAbstract
Inflation performance differs substantially across countries. The characteristics of the political system are considered as important determinants of inflation outcome by economic literature. In particular, political instability and political polarization are associated with higher inflation rates and volatility. This paper provides an alternative explanation for this documented relationship. The paper shows that public budget rigidities (specially, downside nominal inflexibility in public expenses) combined with high political polarization can create incentives leading to higher inflation rates and higher inflation volatility.
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Ensayos de Política Económica