Measuring the impact of violence on macroeconomic instability: evidence from developing countries
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Measuring the impact of violence on macroeconomic instability: evidence from developing countries Rabia Haroon 1 & Zainab Jehan 1 Received: 19 August 2019 / Accepted: 29 October 2020/ # ISEG – Instituto Superior de Economia e Gestão 2020
Abstract Uncertainty induced by various economic and non-economic factors instigates macroeconomic instability. Macroeconomic instability, further, reduces predictability of a country’s macroeconomic situation, leading to misallocation of resources, reduction in economic growth and investment. This study aims at investigating the impact of violence on macroeconomic instability in selected developing countries over the period of 1984–2016. In doing so, the study has used various dimensions of violence in order to test the size, significance and direction of each type of violence for macroeconomic instability. Macroeconomic instability index is computed by using terms of trade, inflation rate, unemployment rate and real exchange rate. For estimating the impact of violence on macroeconomic instability, we have employed system GMM technique. This empirical findings state that violence increases macroeconomic instability in selected sample of developing countries. We also report that among developing countries, low-income countries suffer more from violence in comparison to the middle-income countries. This finding is robust among all dimensions of violence taken by the study. Notably, we have found that the harmful impact of interstate violence is highest for macroeconomic instability. Our findings are robust as violence creates uncertainty which distorts investment, savings and consumption, and hence affects overall economic performance. Keywords Violence . Macroeconomic instability . Globalization . Financial development JEL classification D89 . E24 . F62 . P44 . Q34
Supplementary Information The online version contains supplementary material available at https://doi.org/ 10.1007/s10258-020-00188-y.
* Zainab Jehan [email protected]
1
Department of Economics, Women University, Rawalpindi, Pakistan
R. Haroon, Z. Jehan
1 Introduction The concept of macroeconomic stability has gained considerable attention since 1980s with the initiation of stabilization policies for developing countries (Joya 2011). Macroeconomic stability is a framework of stable and low inflation, predictable exchange rate, sustainable balance of payment position, and prudent macroeconomic policies (Fischer 1992). However, any uncertainty in the performance of these variables leads to macroeconomic instability (Montiel and Servén 2006) while, instability in macroeconomic indicators may be instigated by various factors including inconsistent policies and/or exogenous shocks to the economy (Fischer 1992). Theoretically, Keynesians consider two important factors that affect macroeconomic performance: variations in aggregate demand mainly due to changes in investment spending; changes in aggregate supply due to unfavorable supply side shocks such as wars or artificial shortage of some key resources (Samet
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