Testing the Validity of Political Business Cycle for the Fragile Five Countries

Abstract

Using panel least squares estimation method, this study examines the links between both the business cycles-the components of political stability and the business cycles- aggregate political index (overall score) in the Fragile Five countries, namely Turkey, Indonesia, India, South Africa and Brazil for the period 1986-2013. According to the empirical findings, higher degrees of political instability are associated with lower growth rates of GDP. Moreover, the results suggest that law and order, socio-economic conditions and internal conflict have a positive impact on GDP growth rate. In other words, countries with a lower political risk related to these three indicators had greater GDP growth rate in the period 1986 to 2013. In addition, other findings suggest that high inflation and greater population growth are associated with lower GDP growth, while GDP growth rate in a previous year are positively associated with the business cycles. So, we concluded that political stability is playing an important role in shaping of the business cycles of the Fragile Five countries.

Keywords

• Political Business Cycle
• Cross-sectional dependence