Document Type : Research Paper
Authors
1 PhD in Economics, University of Isfahan, Isfahan, Iran
2 Assistant Professor, Department of Economics, University of Isfahan. Isfahan, Iran
3 Associate Professor, Department of Economics, University of Isfahan, Isfahan, Iran
Abstract
Populist fiscal and monetary policies may temporarily satisfy the masses in the short run, but they often impose lasting structural costs on developing economies. Rapid and persistent inflation has been a key consequence of populist governance in recent decades, especially in Latin American countries. This study analyzes the effect of populist policies on inflation across 21 populist leadership periods in 11 developing countries using panel data methods. Accordingly, three separate models are estimated for right-wing populist governments, left-wing populist governments, and the full sample, covering the period from 1990 to 2023. The estimation results indicate that in left-wing populist governments, both fiscal and monetary policies have a statistically significant impact on inflation, whereas in right-wing populist governments, monetary policy plays the dominant role, with fiscal policy being less influential. These findings align with the economic nature of left-wing populism, which typically involves an expansion of government size, increased public spending, and direct state intervention in the economy.
Introduction
In recent decades, the rise of populist governments in developing countries—particularly in Latin America, the Middle East, and Eastern Europe—has drawn growing attention from scholars in political economy. Economic populism, characterized by expansionary fiscal and monetary policies aimed at short-term public satisfaction, often results in long-term macroeconomic imbalances such as high inflation, fiscal deficits, and financial instability. In the theoretical model proposed by Dornbusch and Edwards (1991), the macroeconomic cycle of populism unfolds through four stages, from initial expansionary policies to eventual inflationary crisis and economic collapse. However, few empirical studies have explicitly compared the effects of left-wing and right-wing populist policies on inflation dynamics. Hence, this study aims to empirically analyze the impact of fiscal and monetary policies of left- and right-wing populist governments on inflation rates in developing countries.
Methods and Materials
The study employs panel data from 21 periods of populist rule across 11 developing countries over the period 1990–2023. The dependent variable is the inflation rate, while the independent variables include government size (proxy for fiscal policy), money supply growth (proxy for monetary policy), exchange rate growth, and lagged inflation as a measure of inflation expectations. Three dummy variables are introduced: one for populist periods (intercept effect) and two interaction dummies to capture the slope effects of populist fiscal and monetary policies. The models are estimated using the Generalized Method of Moments (GMM) to address issues of endogeneity and heteroskedasticity. Separate models are estimated for left-wing populist governments, right-wing populist governments, and the overall sample.
Results and Discussion
The estimation results reveal that both fiscal and monetary policies significantly increase inflation during populist regimes, but their relative impacts differ by political orientation. In left-wing populist governments, fiscal policy plays a dominant role—larger government size and higher public spending are strongly associated with higher inflation. Conversely, in right-wing populist governments, monetary expansion exerts the primary inflationary pressure, while fiscal influence remains weaker. Furthermore, the dummy variables representing populist periods have a positive and statistically significant impact on inflation across all models, confirming the structural role of populism in driving inflation. The findings also indicate that exchange rate shocks and persistent fiscal deficits, when combined with rapid monetary growth, create a self-reinforcing inflationary cycle typical of populist economies.
Conclusion
Overall, the results suggest that ideological differences between left- and right-wing populist governments produce distinct yet convergent inflationary outcomes. Left-wing populism fuels inflation through fiscal expansion and redistributive spending, while right-wing populism does so through irresponsible monetary and exchange rate policies. Regardless of orientation, populist governance leads to macroeconomic instability, erosion of investor confidence, and long-term welfare losses. The study concludes that enforcing transparent fiscal and monetary rules, strengthening central bank independence, and limiting political interference in budgetary processes are essential to prevent the recurrence of populist inflationary cycles.
Keywords
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