Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)
How do Political and Economic Institutions Affect Each Other?
Abstract: This paper provides evidence for the mutually reinforcing
relation of political and economic institutions. To overcome problems of
endogeneity I utilize lag instruments within a GMM framework for dynamic
panel data. Employing recently developed tests, I show that limiting the
number of lag instruments and collapsing the instrument matrix eliminates
many and weak instrument biases. My major findings are that (i) improving
economic institutions has a large positive effect on future political
institutions, and (ii) political institutions have a positive but
quantitatively smaller eect on current economic institutions. In addition,
(iii) political instability positively affects future political
institutions. In line with predictions from the institutional literature,
the timing of effects is such that political institutions depend on lags of
explanatory variables, while economic institutions are contemporaneously
determined. Moreover, results are driven by countries with initially low
political institutions implying that in these countries, much is to be
gained from institutional reform.
Keywords: Political Economy; Economic Institutions.; (follow links to similar papers)
JEL-Codes: O10; P16; (follow links to similar papers)
45 pages, June 30, 2014
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