Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1056: Economic Freedom and Economic Crisis

Christian Bjørnskov ()
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Christian Bjørnskov: Research Institute of Industrial Economics (IFN), Postal: Stockholm, Sweden, and Aarhus University, Denmark

Abstract: In this paper, I explore the politically contested association between the degree of capitalism, captured by measures of economic freedom, and the risk and characteristics of economic crisis. After offering some brief theoretical considerations, I estimate the effects of economic freedom on crisis risk in the post-Cold War period 1993-2010. I further estimate the effects on the duration, peak-to-trough GDP ratios and recovery times of 212 crises across 175 countries within this period. Estimates suggest that economic freedom is robustly associated with smaller peak-to-trough ratios and shorter recovery time. These effects are driven by regulatory components of the economic freedom index.

Keywords: Crisis; Economic freedom; Institutions

JEL-codes: O11; O43; P16

31 pages, January 23, 2015

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