DP7004 Two to Tangle: Financial Development, Political Instability and Economic Growth in Argentina (1896-2000)

Author(s): Nauro F Campos, Menelaos Karanasos, Bin Tan
Publication Date: October 2008
Keyword(s): economic growth, financial development, political instability, power-ARCH, volatility
JEL(s): C14, D72, E23, O40
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7004

This paper investigates the effects of financial development and political instability on economic growth in a power-ARCH framework with data for Argentina from 1896 to 2000. Our findings suggest that (i) informal or unanticipated political instability (e.g., guerrilla warfare) has a direct negative impact on growth; (ii) formal or anticipated instability (e.g., cabinet changes) has an indirect (through volatility) impact on growth; (iii) the effect of financial development is positive and, surprisingly, not via volatility; (iv) the informal instability effects are much larger in the short- than in the long-run; and (v) the impact of financial development on economic growth is negative in the short- but positive in the long-run.