Aggregate Demand Shortfalls and Economic Institutions

14 Pages Posted: 28 Oct 2015

See all articles by Ryan Murphy

Ryan Murphy

Southern Methodist University (SMU)

Taylor Smith

Texas Tech University

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

Murphy, Ryan and Smith, Taylor, Aggregate Demand Shortfalls and Economic Institutions (October 26, 2015). Available at SSRN: or

Ryan Murphy (Contact Author)

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Taylor Smith

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

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