Policy Volatility, Institutions, and Economic Growth

Antonio Fatas and Ilian Mihov

The Review of Economics and Statistics, 2013, vol. 95, issue 2, 362-376

Abstract: In this paper, we present evidence that policy volatility exerts a strong and direct negative impact on growth. Using data for 93 countries, we construct measures of policy volatility based on the standard deviation of the residuals from country-specific regressions of government consumption on output. Undisciplined governments that implement frequent and large changes in government spending unrelated to the state of the business cycle generate lower economic growth. We employ both instrumental variables and panel estimation to address concerns of omitted variables and endogeneity. A 1 standard deviation increase in policy volatility reduces long-term economic growth by about 0.74% in the panel regressions and by more than 1 percentage point in the cross-section. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Keywords: policy volatility; economic growth; government spending (search for similar items in EconPapers)
JEL-codes: E60 H11 O11 O57 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (103)

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Working Paper: Policy Volatility, Institutions and Economic Growth (2005)
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