Democracy And Policy Stability

To explain stable growth performance in democracies the authors characterize political systems in terms of the distribution of political power across groups, and show that in a world where the qualities of available policy alternatives are uncertain, greater democracy leads to more stable choices. The authors design an empirical test of this mechanism by creating measures of the inter-temporal variability in fiscal and trade policies for a panel dataset of 92 countries. In an array of specifications, under 5 different measures of democracy and using sharp episodes of democratization in a difference in difference. This mechanism explains a large part of the negative link between democracy and output volatility.