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Macroeconomic Volatility and Economic Freedom: A Cross-Country Analysis

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  • John W. Dawson

Abstract

This paper examines the empirical relationship between business cycle volatility and economic freedom across countries. In a diverse sample of 85 countries, the results suggest a significantly negative relationship between volatility and a broad measure of freedom—even after controlling for other determinants of cross-country volatility and using an instrumental variables procedure to account for the likely endogeneity of economic freedom. Among the underlying areas of the freedom index, all but the size of government component also have a significantly negative relationship with volatility. Size of government is found to have a significantly positive relationship with volatility. Measures of changes in freedom and the volatility of freedom are found to be statistically insignificant, suggesting that freedom is not among the shocks that cause business cycles. Rather, freedom appears to allow economies to better adjust to those shocks that drive business cycles. Key Words: business cycles, volatility, institutions, economic freedom

Suggested Citation

  • John W. Dawson, 2010. "Macroeconomic Volatility and Economic Freedom: A Cross-Country Analysis," Working Papers 10-03, Department of Economics, Appalachian State University.
    • Handle: RePEc:apl:wpaper:10-03
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    File URL: http://econ.appstate.edu/RePEc/pdf/wp1003.pdf
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    Cited by:

    1. Bodo Knoll & Hans Pitlik & Martin Rode, 2013. "Economic Freedom, Money and Happiness – Why Deregulation Matters Beyond its Wealth Enhancing Effect," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(2), pages 35-42, 07.
    2. John W. Dawson, 2015. "The Empirical Volatility-Growth Relationship: Is Economic Freedom the Missing Link?," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Summer 20), pages 61-82.
    3. repec:apl:wpaper:14-08 is not listed on IDEAS

    More about this item

    Keywords

    business cycles; volatility; institutions; economic freedom;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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