Handling Economic Freedom in Growth Regressions: A Reply to Cole and Lawson
COLE AND LAWSON (2007) STATE THAT â€œEQUATION (1) IS Lawsonâ€™s preferred specification, while de Haan et al. favor Equation (4).â€ That is not an appropriate summary of our position, however. We do not have a preference for Equation (4). In our papers on the relationship between economic freedom and economic performance we have always estimated Equations (3) and (4), using the Extreme Bounds Analysis to test whether (the level or the change in) the Fraser index is robustly related to economic growth. Our results are that the level of economic freedom is not robustly related to growth, in contrast to the change of the economic freedom. In our reply (De Haan and Sturm 2006) to Lawson (2006), we explain that the main reason that we do not consider Equation (1) a proper specification is that Equation (1) is equivalent to Equation (2). All sides in the debate seem to agree that Equation (2) is definitely not a good model as there is a serious problem of endogeneity of one of the right-hand side variables (i.e. EF1).
Volume (Year): 4 (2007)
Issue (Month): 1 (January)
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- Jakob de Haan & Susanna Lundstroem & Jan-Egbert Sturm, 2005.
"Market oriented institutions and policies and economic growth: A critical survey,"
TWI Research Paper Series
5, Thurgauer Wirtschaftsinstitut, Universitï¿½t Konstanz.
- Jakob De Haan & Susanna Lundström & Jan-Egbert Sturm, 2006. "Market-oriented institutions and policies and economic growth: A critical survey," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 157-191, 04.
- Haan, Jakob de & Sturm, Jan-Egbert, 1999.
"On the relationship between economic freedom and economic growth,"
CCSO Working Papers
199903, University of Groningen, CCSO Centre for Economic Research.
- de Haan, Jakob & Sturm, Jan-Egbert, 2000. "On the relationship between economic freedom and economic growth," European Journal of Political Economy, Elsevier, vol. 16(2), pages 215-241, June.
- de Haan, Jakob & Sturm, Jan-Egbert, 2003. "Does more democracy lead to greater economic freedom? New evidence for developing countries," European Journal of Political Economy, Elsevier, vol. 19(3), pages 547-563, September.
- Julio H. Cole & Robert A. Lawson, 2007. "Handling Economic Freedom in Growth Regressions: Suggestions for Clarification," Econ Journal Watch, Econ Journal Watch, vol. 4(1), pages 71-78, January.
- Jakob De Haan & Jan-Egbert Sturm, 2006. "How to Handle Economic Freedom: Reply to Lawson," Econ Journal Watch, Econ Journal Watch, vol. 3(3), pages 407-411, September.
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