Regulation and Macroeconomic Performance

44 Pages Posted: 12 Jan 2005

See all articles by Norman Loayza

Norman Loayza

World Bank - Research Department

Ana Maria Oviedo

University of Maryland - Department of Economics; University of Warwick

Luis Servén

World Bank - Development Research Group (DECRG)

Date Written: September 2004

Abstract

Regulation is purportedly enacted to serve specific social purposes. In reality, however, it follows a more complex political economy process, where legitimate social goals are mixed with the objectives of particular interest groups. Whatever its justification and objectives, regulation can have potentially significant macroeconomic consequences, by helping or hampering the dynamics of economic restructuring and resource reallocation that underlie the growth process. This paper provides an empirical analysis of the macroeconomic impact of regulation. It first characterizes the stylized facts on regulation across the world, using a set of newly constructed, comprehensive indicators of regulation in a large number of countries in the 1990s. Using these indicators, the paper studies the effects of regulation on economic growth and macroeconomic volatility employing cross-country regression analysis. In particular, the paper considers whether the effects of regulation are affected by the country's level of institutional development. Finally, the analysis controls for the likely endogeneity of regulation with respect to macroeconomic performance. The paper concludes that a heavier regulatory burden reduces growth and increases volatility, although these effects are smaller the higher the quality of the overall institutional framework.

Keywords: Regulation, government structure, volatility, economic growth

JEL Classification: H11, K20, K30, E32, O40

Suggested Citation

Loayza, Norman and Oviedo, Ana Maria and Servén, Luis, Regulation and Macroeconomic Performance (September 2004). World Bank Policy Research Working Paper No. 3469. Available at SSRN: https://ssrn.com/abstract=643682

Norman Loayza (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Ana Maria Oviedo

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

University of Warwick

Coventry CV4 7AL
United Kingdom

Luis Servén

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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