Policy Volatility, Institutions, and Economic Growth

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.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 366 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.