Does democracy lower growth volatility? A dynamic panel analysis

This paper employs dynamic panel generalized method of moment (GMM) technique to empirically examine the causal relationship between democracy and growth volatility for a sample of 138 countries over the 1968-2002 period. Improving upon the methodology of earlier papers, this study finds that the causal effects of democracy on volatility are not highly robust as previously suggested. Instead, the results of this paper indicate that the democracy-volatility relationship may depend on the ethnic structure of a society. In countries with high degrees of ethnic heterogeneity, democracy appears to significantly reduce growth volatility; in countries with low degrees of ethnic diversity such a relationship is not significant.