Economic Uncertainty and Structural Reforms
40 Pages Posted: 16 Nov 2015
Date Written: November 2015
Does economic uncertainty promote the implementation of structural reforms? We answer this question using one of the most exhaustive cross-country panel data set on reforms in six major areas and measuring economic uncertainty with stock market volatility. To address endogeneity concerns, we propose various identification strategies, instrumenting uncertainty with world shocks to volatility and with natural disasters, terrorist attacks, political coups and revolutions. Across all specifications, we find that uncertainty has a positive and significant effect on the adoption of reforms. This result is robust to the inclusion of a large number of controls, including political variables, economic variables, crisis indicators, and a host of country, reform and time fixed effects. These findings are broadly consistent with recent models suggesting that uncertainty promotes reforms by mitigating agency problems between policy makers and voters.
Keywords: reforms, uncertainty
JEL Classification: E02, E60, L51
Suggested Citation: Suggested Citation