Crises to die for: a quantitative study of financial crises, political instability, and economic growth
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This thesis emphasizes the multidimensionality of political instability when examining whether financial crises may trigger political instability, and how financial crises and instability affect the growth rate of the economy. A total of 20 political instability indicators are used to make four indices of instability by means of Principal Component Analysis. These indices are thought to reflect different dimensions of political instability: political violence, civil protest, regime change and government instability. I use data for a panel of 148 countries over 35 years to investigate the questions put forth. The chosen quantitative approach employs a panel data regression model that emphasizes differences within and between the units being studied. Findings suggest that financial crises may trigger socio-political instability as measured by the indices of political violence and civil protest. I also uncover that political instability is highly contagious. Furthermore, financial crises have an expected negative effect on economic growth. The relationship between political instability and growth has been intensively discussed in the literature, and the many contradictory results have contributed to fueling this discussion. My findings of opposing effects confirm the appropriateness of modeling political instability as multidimensional. Only change of or in regimes affect the growth rate of the economy, but interestingly, government instability is positive, while regime changes are negative for growth.