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Using a dynamic panel data approach, we estimate the impact of the political and institutional factors on inflation. Estimation results show that a lower degree of political instability generates lower inflation only for developed and low-inflation countries. However, when political freedom is taken into account, political instability appears to be influential on inflation also for developing countries and turns out to be significant only for high-inflation countries. Such findings emphasize the inflation-reducing effects of political stability depending on democratic political structure.

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This article tests the validity of Purchasing Power Parity (PPP) for Commonwealth of Independent States (CIS) countries. For this purpose we test whether the real exchange rate series of 10 CIS countries vis-à-vis the US dollar follow a stationary process. Considering the fact that the CIS countries have undergone major structural changes during the transition period, in addition to conventional unit root tests, we employ recently developed unit root tests that allow for structural breaks and non-linearities. When possible structural changes and non-linearities are not taken into account, the null hypothesis of unit root is rejected only in two out of 10 series. However, allowing for structural breaks and/or non-linearities in the data generating process results in more rejection of the null hypothesis of unit root. All in all, our results provide evidence in favour of the PPP hypothesis in these transition countries.