Economic Freedom and Economic Growth: A Short-run Causal Investigation
The freedom and growth literature has consistently shown that nations which have fewer restrictions on private agents and transactions tend to higher levels of economic growth. It is less clear, however, whether freedom causes growth, growth causes freedom, or the two are jointly determined. To assess these possibilities, Granger-causality tests are performed on annual freedom indicators developed by the Heritage Foundation and national growth rates. The underlying component indexes, which include Trade Policy, Taxation, Government Intervention, Monetary Policy, Capital Flows and Foreign Investment, Banking, Wage and Price Controls, Property Rights, Regulation, and Black Markets, are also tested in addition to the summary freedom rating. The tests suggest the average level of freedom in a nation, as well as many of the specific underlying components of freedom, precedes growth. However, growth may precede one of the component indexes (Government Intervention), and no relationship is found to exist between growth and two of the indexes (Trade Policy and Taxation).
Volume (Year): 3 (2000)
Issue (Month): (May)
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- Dawson, John W, 1998. "Institutions, Investment, and Growth: New Cross-Country and Panel Data Evidence," Economic Inquiry, Western Economic Association International, vol. 36(4), pages 603-619, October.
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- W. Kenn Farr & Richard A. Lord & J. Larry Wolfenbarger, 1998. "Economic Freedom, Political Freedom, and Economic Well-Being: A Causality Analysis," Cato Journal, Cato Journal, Cato Institute, vol. 18(2), pages 247-262, Fall.
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