INTRODUCTION

In recent years there has been an increased interest in analysing the effects of political incentive constraints on macro-economic policy. More and more economists are now using elements of public choice and game theory in an effort to better understand why some countries, at some specific moments in time, choose specific macro-economic policies. This new research programme on endogenous economic policy addresses questions such as: why do some countries rely more heavily on the inflation tax than others; why are fiscal deficits so different across countries; why do different countries choose different exchange rate policies, and so on. The answers emphasise the role of government's strategic behaviour, and of institutions that determine policy-making.

In spite of this mounting interest in the political economy of macro-economic policy, until now there has been relatively little empirical work on the subject. The purpose of this chapter is to present the results of a comparative cross-country empirical analysis of the political determinants of the inflation tax. Our analysis differs from previous work in three respects: first, we use a new data set on cross country political events and political institutions. An advantage of using these new data is that they are free from some of the more serious limitations encountered in other data sets which have been previously used by political scientists and economists (including ourselves). Second, in this chapter we use alternative definitions of the inflation tax and of seignorage in an effort to check for the robustness of the results. And third, we try to discriminate empirically between two alternative families of models that emphasise political explanations of inflation: models based on political instability and government 'myopia', and models of decentralised policy making that focus on the relative weakness (or strength) of the government in office.