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

  • Levine, Ross
  • Zervos, Sara

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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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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  1. Edward E. Leamer, 1982. "Let's Take the Con Out of Econometrics," UCLA Economics Working Papers 239, UCLA Department of Economics.
  2. Grossman, Gene M & Helpman, Elhanan, 1990. "Trade, Innovation, and Growth," American Economic Review, American Economic Association, vol. 80(2), pages 86-91, May.
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  13. 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.
  14. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
  15. Roubini, N. & Sala-I-Martin, X., 1991. "Financial development , the Trade Regime and Economic Growth," Papers 646, Yale - Economic Growth Center.
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  17. 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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