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Looking at the facts : what we know about policy and growth from cross-country analysis

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  • Levine, Ross
  • Zervos, Sara

Abstract

What has the profession learned from cross-country regressions about the links between long-run growth and indicators of fiscal, monetary, trade, financial, and exchange-rate policies? The authors find that: indicators of financial development are strongly associated with long-run growth; other individual policy indicators are only weakly linked to growth; and it is particularly difficult to find a consistent relationship between inflation and long-run growth. For example, the inclusion or exclusion of one or two countries (Nicaragua and Uganda) out of more than 100 countries in the sample can lead to reaching three quite different conclusions: (1) that only very high inflation is bad for growth; (2) that very high inflation in itself is not bad for growth, but small increases in inflation in moderate-inflation countries slow growth; or (3) that inflation is unrelated to growth. The connections between policy indicators and growth are quite sensitive to slight alterations in the right-hand-side variables and to small changes in the sample of countries. And the daunting array of methodological problems limiting the ability to interpret cross-country regressions implies that, at best, they suggest interesting empirical regularities. Cross-country regressions should not be used to predict by how much long-run growth will change when policies change. But beliefs about policy and growth that are not supported by cross-country evidence will tend to be viewed skeptically. So, future work on the policy-growth nexus should integrate broad cross-country analyses with country case studies and investigations of specific firms.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1115.

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Date of creation: 31 Mar 1993
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Handle: RePEc:wbk:wbrwps:1115

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Keywords: Governance Indicators; Economic Theory&Research; Economic Conditions and Volatility; Environmental Economics&Policies; Achieving Shared Growth;

References

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  1. Summers, Robert & Heston, Alan, 1988. "A New Set of International Comparisons of Real Product and Price Levels Estimates for 130 Countries, 1950-1985," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 34(1), pages 1-25, March.
  2. Leamer, Edward E, 1983. "Let's Take the Con Out of Econometrics," American Economic Review, American Economic Association, vol. 73(1), pages 31-43, March.
  3. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  4. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  5. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
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  8. Orphanides, Athanasios & Solow, Robert M., 1990. "Money, inflation and growth," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 6, pages 223-261 Elsevier.
  9. De Gregorio, Jose, 1992. "The effects of inflation on economic growth : Lessons from Latin America," European Economic Review, Elsevier, vol. 36(2-3), pages 417-425, April.
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  12. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  13. Leamer, Edward E, 1985. "Sensitivity Analyses Would Help," American Economic Review, American Economic Association, vol. 75(3), pages 308-13, June.
  14. Fischer, Stanley, 1979. "Anticipations and the Nonneutrality of Money," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 225-52, April.
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  16. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  17. McAleer, Michael & Pagan, Adrian, 1985. "What Will Take the Con Out of Econometrics?," CEPR Discussion Papers 39, C.E.P.R. Discussion Papers.
  18. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
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Citations

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Cited by:
  1. M.Rosaria Alfano & A. Laura Baraldi, 2008. "The design of electoral rules and their impact on economic growth: the Italian case," Working Papers 3_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  2. Levine, Ross & Zervos, Sara, 1996. "Stock Market Development and Long-Run Growth," World Bank Economic Review, World Bank Group, vol. 10(2), pages 323-39, May.
  3. Martijn Brons & Henri L.F.M. de Groot & Peter Nijkamp, 1999. "Growth Effects of Fiscal Policies - A Comparative Analysis in a Multi-Country Context," Tinbergen Institute Discussion Papers 99-042/3, Tinbergen Institute.
  4. Sanghamitra Bandyopadhyay, 2003. "Convergence Club Empirics: Some Dynamics and Explanations of Unequal Growth across Indian States," STICERD - Distributional Analysis Research Programme Papers 69, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  5. Rodrigo Suescún, 1995. "Growth Welfare Costs And Aggregate Fluctuations In Economies With Monetary Taxation," BORRADORES DE ECONOMIA 002774, BANCO DE LA REPÚBLICA.
  6. ZeinabPartow, 2005. "La Relación Inflación-Crecimiento: Un Resumen Con Algunas Implicaciones Para Colombia," BORRADORES DE ECONOMIA 003079, BANCO DE LA REPÚBLICA.
  7. Zeinab Partow, . "La Relación Inflación-Crecimiento: Un Resúmen con algunas Implicaciones para Colombia," Borradores de Economia 023, Banco de la Republica de Colombia.
  8. Danila Serra, 2005. "Empirical determinants of corruption: A sensitivity analysis," Economics Series Working Papers GPRG-WPS-012, University of Oxford, Department of Economics.
  9. B. Bosworth & S. M. Collins & Y. Chen, . "Accounting for Difference in Economic Growth," Discussion Papers 115, Brookings Institution International Economics.
  10. Böwer, Uwe & Guillemineau, Catherine, 2006. "Determinants of business cycle synchronisation across euro area countries," Working Paper Series 0587, European Central Bank.
  11. Dehn, Jan, 2000. "The effects on growth of commodity price uncertainty and shocks," Policy Research Working Paper Series 2455, The World Bank.
  12. Mwangi S. Kimenyi, 2006. "Economic Reforms and Pro-Poor Growth: Lessons for Africa and other Developing Regions and Economies in Transition," Working papers 2006-02, University of Connecticut, Department of Economics.
  13. Brunetti, Aymo, 1998. "Policy volatility and economic growth: A comparative, empirical analysis," European Journal of Political Economy, Elsevier, vol. 14(1), pages 35-52, February.

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