Institutions, human capital, and economic Output volatility: A Case of Open Economies

Mujahid, Hira and Alam, Shaista (2016): Institutions, human capital, and economic Output volatility: A Case of Open Economies. Published in: Pakistan Journal of Applied Economics No. Special

Abstract

Nowadays, it is debated why some countries are facing great macroeconomic volatility and crises. The basic reasons for dreadful macroeconomic performance and volatility are due to poor quality of institutions and unnecessary government spending, high inflation, and mismanaged exchange rates. This study investigates the relationship between institutional quality, human capital, and volatility of economic output; and uses various indicators of institutional quality. The sample includes a panel of 140 open economies, subject to the availability of data covering the annual time period from 2002 to 2014. The results propose that greater institutional quality increases economic performance and reduces the output volatility in the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Macroeconomic Volatility, Economic Performance, Quality of Institutions.
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B25 - Historical ; Institutional ; Evolutionary ; Austrian; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General; F - International Economics > F1 - Trade > F10 - General

References

Acemoglu, D., S. Johnson, and J. Robinson, 2001, Colonial origins of comparative development: An empirical investigation, American Economic Review, 91: 1369-1401.

Acemoglu, D., S. Johnson, and J. Robinson, 2002, Reversal of fortune: Geography and institutions in the making of the modern world income distribution, Quar- terly Journal of Economics, 117 (4):1231-1294.

Acemoglu, D., S. Johnson, J. Robinson, and P. Yared, 2003, Institutional causes, macroeconomic symptoms: Volatility, crises and growth, Journal of Monetary Economics, Elsevier, 50(1): 49-123.

Acemoglu, D., S. Johnson, J. Robinson, and P. Yared, 2005, From education to democracy?, The American Economic Review: Papers and Proceedings, 95(2): 44-49.

Aisen, A., and F.J. Veiga, 2013, How does political instability affect economic growth?, European Journal of Political Economy, Elsevier, 29: 151-167.

Arellano, M., and S.R. Bond, 1991, Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations, Review of Economic Studies, 58: 277-297. Bardhan, P., 1984, The political economy of development in India, Oxford: Basil Blackwell.

Barro, R.J., and J. Robert, 1991, Economic growth in a cross section of countries, The Quarterly Journal of Economics, 106(2): 407-443. Barro, R.J., and B.G. David, 1983, Rules, discretion and reputation in a model of monetary policy, Journal of Monetary Economics, 12: 101-121.

Calderón, C., R. Duncan, and K.Schmidt-Hebel, 2012, Do good institutions pro- mote counter-cyclical macroeconomic policies? Federal Reserve Bank of Dal- las, Globalization and Monetary Policy Institute, Working paper 118.

Castello-Climent, A., 2008. On the distribution of education and democracy, Journal of Development Economics, 87: 179-190.

Dollar, D., and A. Kraay, 2003, Institutions, trade, and growth, Journal of Monetary Economics, Elsevier,50(1): 133-162, January.

Dornbusch, R., I.Goldfajn, and R.O. Valdés, 1995, Currency crises and collapses, Brookings Papers on Economic Activity, Economic Studies Program: The Brookings Institution, 26(2): 219-294.

Duncan, R., 2013, Institutional quality, the cyclicality of monetary policy and macroeconomic volatility, Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute, Working paper 163, Retrieved from http://www.dal- lasfed.org/assets/documents/institute/wpapers/2013/0163.pdf.

Easterly, W., 2005, National policies and economic growth: A reappraisal, Hand- book of Economic Growth, 1015-1059.

Glaeser, E.L., R. Porta, F. Lopez-de-Silanes, and A. Shleifer, 2004, Do institutions cause growth? Retrieved from https://mba.edhec.edu/mailing/drd/flds/doinsti- tutionscausegrowth-pdf.pdf.

Greene, W.H., 2008, Econometric analysis, 6th edition, Upper Saddle River, N.J.: Prentice Hall.

Hall, R. E., and I.J. Charles, 1999, Why do some countries produce so much more output per worker than others?, Quarterly Journal of Economics, 114: 83-116. Holtz-Eakin, D., W. Newey, and H.S.

Rosen, 1988, Estimating vector autoregres- sions with panel data, Econometrica, 56:1371-1395.

James, H.S., and W. Mark, 2007, Introduction to econometrics, 2nd edition, Boston: Pearson Addison Wesley.

Jones, E.L., 1981, The European miracle: Environments, economies and geopolitics in the history of Europe and Asia, Cambridge: Cambridge University Press.

Kalonda-Kanyama, I., and O. Kodila-Tedika, 2012, Quality of institutions: Does intelligence matter?, Working papers series in theoretical and applied econom- ics, 201206: University of Kansas, Department of Economics.

Kalonda-Kanyama, I., 2012, A new look at the effect of the determinants of gov- ernment institutions: A cross-sectional analysis, MPRA paper 47575, University library of Munich, Germany.

Kaminsky, G.L., and M.R. Carmen, 1999, The twin crises: The causes of banking and balance-of-payments problems, American Economic Review, 89(3): 473-500.

Knack, S., and P. Keefer, 1995, Institutions and economic performance: Cross- country tests using alternative institutional measures, Economics and Politics, 7: 207–227.

Krugman, P.R., 1979, Intraindustry specialization and the gains from trade, Journal of Political Economy, 89(5): 959-973.

Lipset, S.M., 1960, Political man, doubleday Company, Inc., N.Y., Retrieved from http://www.questia.com/PM.qst?a=o&d=23560876.

Lynn, R., and T. Vanhanen, 2012, National IQs: A review of their educational, cog- nitive, economic, political, demographic, sociological, epidemiological, geo- graphic, Intelligence, doi:10.1016/j.intell.2011.11.004.

Mankiw, N. Gregory, 2007, Macroeconomics, New York: Worth Publishers. Mehlum, H., K. Moene and R. Torvik, 2006, Institutions and the resource curse, Economic Journal, 116(508): 1-20.

Mobarak, A., 2005, Democracy, volatility, and economic development, Review of Economics and Statistics, 87(2): 348-361. North, D., 1990, Institutions, institutional change and economic performance, Cam- bridge: Cambridge University Press.

Olson, M.C., 1982, The rise and decline of nations, New Haven, CT: Yale University Press. Papaioannou, E., 2008, What drives international financial flows? Politics, institu- tions and other determinants, Journal of Development Economics, 88: 269-281.

Pritchett, L., 2000, Understanding patterns of economic growth: Searching for hills among plateaus, Mountains, and plains, The World Bank Economic Review, 14(2): 221-250.

Rodrik, D., 2002, Reforms in Argentina, take two: Trade rout, The New Republic. Rogers, M.L., 2008, Directly unproductive schooling: How country characteristics affect the impact of schooling on growth, Europeon Economic Review, 52(2): 356-385. doi:10.1016/j.euroecorev.2007.03.001.

Sawyer, W.C., 2010, Institutional quality and economic growth in Latin America, Global Economy Journal, 10(4): 2-2.

Serven, L., 1997, Uncertainty, volatility, and irreversible investment: Theory, evi- dence, and lessons for Africa, Journal of African Economies, 6(3): 229-268.

Sokoloff K.L., and L.E. Stanley, 2000, Institutions, factor endowments, and paths of development in the new world, Journal of Economic Perspectives, American Economic Association, 14(3): 217-232.

Tornell, A., and A. Velasco, 1992, The tragedy of the commons and economic growth: Why does capital flow from poor to rich countries? Journal of Political Economy, 100: 1208–1231. Zhou, Y., Economic Change and Restructuring, 2018, 51:1, https://doi.org/10.1007/ s10644-016-9194-x.