The Political Economy of Inflation and Stabilization in Developing Countries

This paper deals with political aspects of inflation and stabilization in developing countries. It is argued that by ignoring political considerations, traditional models failed to fully understand the dynamics of inflation. Several newer models are discussed, • including models based on strategic government behavior and war of attrition models. Empirical results obtained with developing countries data are discussed in detail. Date on Chile are used to test several versions of political business cycle models. It is found that this perspective helps explain the evolution of inflation through time in that country. Finally, data on a large cross section of countries are used to investigate the politicaleconomy circumstances surrounding major devaluation crises