Is the Link between Reforms and Growth Spurious? A Comment

Abstract:     
Rzonca and Cizkowicz (2003) notice that by construction the reform indicators are bound from the above, and the resulting time series characteristics of these variables render estimates of coefficients in growth regressions spurious. We illustrate this issue further, applying econometric tests. Our main conclusions are the following: (i) joint use of contemporaneous and lagged values of reform indicators may lead to spurious results, (ii) this is more likely in estimations based on longer time windows, which include 'post transition' years. Nevertheless, the existing empirical evidence is sufficient to demonstrate: (iii) a positive link between the reforms and economic growth, and (iv) a lag between the reforms implementation and the positive response in economic growth.

Number of Pages in PDF File: 22

Keywords: growth, reform, liberalisation index, transition, inflation

JEL Classification: P27, O49

working papers series