Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth

Daron Acemoglu, Simon Johnson, James Robinson and Yunyong Thaicharoen ()

No 3575, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Countries that have pursued distortionary macroeconomic policies, including high inflation, large budget deficits and misaligned exchange rates, appear to have suffered more macroeconomic volatility and also grown more slowly during the postwar period. Does this reflect the causal effect of these macroeconomic policies on economic outcomes? One reason to suspect that the answer may be no is that countries pursuing poor macroeconomic policies also have weak ?institutions?, including political institutions that do not constrain politicians and political elites, ineffective enforcement of property rights for investors, widespread corruption, and a high degree of political instability. This Paper documents that countries that inherited more ?extractive? institutions from their colonial past were more likely to experience high volatility and economic crises during the postwar period. More specifically, societies where European colonists faced high mortality rates more than 100 years ago are much more volatile and prone to crises. Based on our previous work, we interpret this relationship as due to the causal effect of institutions on economic outcomes: Europeans did not settle and were more likely to set up extractive institutions in areas where they faced high mortality. Once we control for the effect of institutions, macroeconomic policies appear to have only a minor impact on volatility and crises. This suggests that distortionary macroeconomic policies are more likely to be symptoms of underlying institutional problems rather than the main causes of economic volatility, and also that the effects of institutional differences on volatility do not appear to be primarily mediated by any of the standard macroeconomic variables. Instead, it appears that weak institutions cause volatility through a number of microeconomic, as well as macroeconomic, channels.

Keywords: Exchange rates; Crises; Economic growth; Economic instability; inflation; Institutions; Macroeconomic policies; Volatility; The washington consensus; Government spending (search for similar items in EconPapers)
JEL-codes: E30 N10 O11 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-dev, nep-ifn and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (85)

Downloads: (external link)
https://cepr.org/publications/DP3575 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Institutional causes, macroeconomic symptoms: volatility, crises and growth (2003)
Working Paper: Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth (2002)
Working Paper: Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3575

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3575

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().