Institutions and Growth: A GMM/IV Panel VAR Approach
15 Pages Posted: 14 Sep 2015
Date Written: July 2015
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 percent shock in institutional quality leads to a peak 1.7 percent 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.
Keywords: Institutions, Panel VAR, Economic Development, gdp, gdp per capita, results, Semiparametric and Nonparametric Methods, Models with Panel Data, Institutions and Growth, Economic Development.,
JEL Classification: C14, C33, O43
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