Aggregate Demand Shortfalls and Economic Institutions
14 Pages Posted: 28 Oct 2015
Date Written: October 26, 2015
Political instability is often exacerbated in periods of aggregate demand shortfall, with both short and long-term implications for economic institutions. It has been conjectured that inadequate policy responses to recessions may be inimical to free economic institutions. This paper uses the Economic Freedom of the World index as its measure of economic institutions, and finds that the change in economic freedom in the following five, ten, and fifteen years is negatively impacted by an aggregate demand shortfall as measured by negative NGDP growth. The result is (largely) robust upon the exclusion of the monetary policy variables from Economic Freedom of the World, but is not robust if economic institutions are measured as trade openness.
Keywords: Economic Institutions; Voting Behavior; Economic Freedom; Macroeconomic Political Economy
JEL Classification: D72, E39, P16
Suggested Citation: Suggested Citation