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The Growth Effects of Institutional Instability

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  • Berggren, Niclas

    ()
    (The Ratio Institute)

  • Bergh, Andreas

    ()
    (The Ratio Institute)

  • Bjørnskov, Christian

    ()
    (Aarhus University, Department of Economics)

Abstract

Both institutional quality and institutional stability have been argued to stimulate economic growth. But to improve institutional quality, a country must endure a period of institutional change, which implies at least a little and possibly a lot of institutional instability. We investigate the growth effects of institutional quality and instability, using the political risk index from the ICRG in a cross-country study of 132 countries, measuring instability as the coefficient of variation. Using the aggregate index, we find evidence that institutional quality is positively linked to growth. While institutional instability is negatively related to growth in the baseline case, there are indications that the effect can be positive in rich countries, suggesting that institutional reform is not necessarily costly even during a transition period. Sensitivity analysis, e.g., decomposing the political risk index by using both its constituting components and the results of a principal components analysis, using other measures of institutional quality and excluding outliers, confirm the general results, with qualifications.

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Bibliographic Info

Paper provided by The Ratio Institute in its series Ratio Working Papers with number 135.

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Length: 36 pages
Date of creation: 02 Jun 2009
Date of revision:
Handle: RePEc:hhs:ratioi:0135

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Keywords: Institutions; Instability; Growth; Transaction costs; Uncertainty;

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Cited by:
  1. Hartwell , Christopher A., 2014. "The impact of institutional volatility on financial volatility in transition economies: a GARCH family approach," BOFIT Discussion Papers 6/2014, Bank of Finland, Institute for Economies in Transition.
  2. Rode, Martin & Gwartney, James D., 2012. "Does democratization facilitate economic liberalization?," European Journal of Political Economy, Elsevier, vol. 28(4), pages 607-619.
  3. Mogens Justesen & Peter Kurrild-Klitgaard, 2013. "Institutional interactions and economic growth: the joint effects of property rights, veto players and democratic capital," Public Choice, Springer, vol. 157(3), pages 449-474, December.
  4. Christian Bjørnskov & Pierre-Guillaume Méon, 2010. "The productivity of trust," Working Papers CEB 10-042, ULB -- Universite Libre de Bruxelles.
  5. Enrico Colombatto, 2012. "A theory of institutional legitimacy," ICER Working Papers 05-2012, ICER - International Centre for Economic Research.

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