Growth, Volatility & Political Instability: Non Linear Time Series Evidence for Argentina 1896-2000

Abstract

What is the relationship between economic growth and its volatility? Does political instability affect growth directly or indirectly, through volatility? This paper tries to answer such questions using a power-ARCH framework with annual time series data for Argentina from 1896 to 2000. We show that while assassinations and strikes (what we call ìinformalî political instability) have a direct negative effect on economic growth, ìformalî political instability (constitutional and legislative changes) has an indirect (through volatility) negative impact. We also find preliminary support for the idea that while the effects of ìformalî instability are stronger in the long-run, those of ìinformalî instability are stronger in the short-run.