Political Stability and Economic Development : Analysing correlations between political stability and inflation, GDP per capita growth, unemployment

Abstract: The main aim of this thesis is to investigate the relationship between political stability, inflation, unemployment, GDP per capita, and vice versa. Previously this question has been studied in the relationship between political stability and each of these economic variables individually. With this research we can analyse if the poor economic performance in some countries is caused by unstable political institutions, that is why we find it important. Here we are analysing and comparing all of the economical variables at the same time and analysing which ones show the strongest relationships, or if the relationships are significant or not significant. In previous studies, the measurements that were used for political stability were: government changes, cabinet changes, index of economic freedom, or polity state. However, in this paper, the political stability measurement used is the Political stability index and Absence of Violence/Terrorism, which measures the likelihood that the government will be destabilised. Additionally, differently, from previous studies, Granger causality is used to understand causality between political stability and economic development variables.