Economic Freedom and Economic Crisis
32 Pages Posted: 26 Nov 2014 Last revised: 24 Jan 2015
Date Written: January 23, 2015
In this paper, I explore the politically contested association between the degree of capitalism, captured by measures of economic freedom, and the risk and characteristics of economic crisis. After offering some brief theoretical considerations, I estimate the effects of economic freedom on crisis risk in the post-Cold War period 1993-2010. I further estimate the effects on the duration, peak-to-trough GDP ratios and recovery times of 212 crises across 175 countries within this period. Estimates suggest that economic freedom is robustly associated with smaller peak-to-trough ratios and shorter recovery time. These effects are driven by regulatory components of the economic freedom index.
Keywords: Crisis, economic freedom, institutions
JEL Classification: O11, O43, P16
Suggested Citation: Suggested Citation