Institutions and growth: A GMM/IV Panel VAR approach

Both sides of the institutions and growth debate have resorted largely to microeconometric techniques in testing hypotheses. In this paper, I build a panel structural vector autoregression (SVAR) model for a short panel of 119 countries over 10 years and find support for the institutions hypothesis....

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Bibliographic Details
Published in:Economics letters 2016-01, Vol.138, p.85-91
Main Author: Góes, Carlos
Format: Article
Language:English
Subjects:
Econometrics
Economic development
GDP
Gross Domestic Product
Hypothesis testing
Institutions
Microeconomics
Panel VAR
Per capita
Studies
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Summary:Both sides of the institutions and growth debate have resorted largely to microeconometric techniques in testing hypotheses. In this paper, I build a panel structural vector autoregression (SVAR) model for a short panel of 119 countries over 10 years and find support for the institutions hypothesis. Controlling for individual fixed effects, I find that exogenous shocks to a proxy for institutional quality have a positive and statistically significant effect on GDP per capita. On average, a 1% shock in institutional quality leads to a peak 1.7% increase in GDP per capita after six years. Results are robust to using a different proxy for institutional quality. There are different dynamics for advanced economies and developing countries. This suggests diminishing returns to institutional quality improvements. •Institutions and growth have a bi-directional and dynamic relationship.•I build a Panel SVAR which controls for country fixed-effects.•A 1% shock in institutional quality leads to a peak 1.7% increase in GDP per capita.•There are different dynamics for advanced economies and developing countries.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2015.11.024