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Rule of Law, Democracy, Openness and Income: Estimating the Interrelationships

  • Rigobon, Roberto
  • Rodrik, Dani

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East-West versus those aligned on a North-South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4653.

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Date of creation: Oct 2004
Date of revision:
Handle: RePEc:cpr:ceprdp:4653
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  1. Roberto Rigobon & Brian P. Sack, 2002. "The impact of monetary policy on asset prices," Finance and Economics Discussion Series 2002-4, Board of Governors of the Federal Reserve System (U.S.).
  2. Roberto Rigobon, 2001. "Contagion: How to Measure It?," NBER Working Papers 8118, National Bureau of Economic Research, Inc.
  3. Guglielmo Maria Caporale & Andrea Cipollini & Panicos Demetriades, 2003. "Monetary Policy and the Exchange Rate During the Asian Crisis: Identification Through Heteroscedasticity," CEIS Research Paper 23, Tor Vergata University, CEIS.
  4. Gabriele Fiorentini & Enrique Sentana Iváñez, 1997. "Identification, estimation and testing of conditionally heteroskedastic factor models," Working Papers. Serie AD 1997-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  6. gulielmo maria caporale & rea cipollini & nicola spagnolo, 2004. "Testing For Contagion: A Conditional Correlation Analysis," International Finance 0406003, EconWPA.
  7. Rodrik, Dani & Subramanian, Arvind & Trebbi, Francesco, 2002. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," CEPR Discussion Papers 3643, C.E.P.R. Discussion Papers.
  8. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  9. Edward E. Leamer, 1979. "Is it a Demand Curve, or is it a Supply Curve?: Partial Identification Through Inequality Constraints," UCLA Economics Working Papers 153, UCLA Department of Economics.
  10. Alcala, Francisco & Ciccone, Antonio, 2001. "Trade and Productivity," CEPR Discussion Papers 3095, C.E.P.R. Discussion Papers.
  11. Easterly, William & Levine, Ross, 2003. "Tropics, germs, and crops: how endowments influence economic development," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 3-39, January.
  12. Roberto Rigobon & Brian P. Sack, 2003. "Spillovers across U.S. financial markets," Finance and Economics Discussion Series 2003-13, Board of Governors of the Federal Reserve System (U.S.).
  13. Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
  14. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  15. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," Econometric Society 2004 North American Summer Meetings 508, Econometric Society.
  16. Roberto Rigobon, 2001. "The Curse of Non-Investment Grade Countries," NBER Working Papers 8636, National Bureau of Economic Research, Inc.
  17. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth : revisiting the evidence," Policy Research Working Paper Series 3004, The World Bank.
  18. Evans, Martin D.D. & Lyons, Richard K., 2008. "How is macro news transmitted to exchange rates?," Journal of Financial Economics, Elsevier, vol. 88(1), pages 26-50, April.
  19. Hélène Poirson & Luca Antonio Ricci & Catherine A. Pattillo, 2004. "What Are the Channels Through Which External Debt Affects Growth?," IMF Working Papers 04/15, International Monetary Fund.
  20. repec:oup:qjecon:v:118:y:2003:i:2:p:639-669 is not listed on IDEAS
  21. repec:tpr:qjecon:v:119:y:2004:i:2:p:612-645 is not listed on IDEAS
  22. Jeffrey D. Sachs, 2003. "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income," NBER Working Papers 9490, National Bureau of Economic Research, Inc.
  23. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  24. repec:tpr:qjecon:v:121:y:2006:i:2:p:541-585 is not listed on IDEAS
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