Inequality and the instability of polity and policy

We create alternative measures of political instability, which capture only movements from dictatorship to democracy and vice versa and, unlike older, well known measures does not capture government changes that preserve the democratic or dictatorial structure of the country. We show that inequality is positively correlated with our measures of political instability as well as with a well-known measure (used by Alesina and Perotti), but the impact of inequality on the latter is only through components of political instability captured by our measures. We show that our measures of political instability have significant policy implications – it increases both fiscal and trade polity volatility