Democracy and business cycles: Evidence from Portuguese economic

order to test three hypotheses as to the roots of instability during the Republic: exceptionally high public expenditure made necessary by participation in World War I, the Fiscal Hypothesis ; expansion of the money supply and increase in its variability, the Monetary Hypothesis. ; social and political unrest, facilitated by greater freedom in expressing grievances, the Democracy Hypothesis. Using standard econometric techniques we find strong evidence in favour of the Monetary and the Democracy Hypotheses but not in favour of the Fiscal Hypothesis. Moreover, our results support the view that political and monetary instability were mutually reinforcing phenomena. The examination of the two periods, Monarchy and Republic, reveals a strong positive association between political and economic cycles in the later, more democratic period.