Economic freedom and democracy: determinant factors in increasing macroeconomic stability
-
DOIhttp://dx.doi.org/10.21511/ppm.16(2).2018.26
-
Article InfoVolume 16 2018, Issue #2, pp. 279-290
- Cited by
- 1669 Views
-
285 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The main goal of the article is to analyze the role and influence of economic freedom on macroeconomic stability. For this purpose, the authors used the integrated index of economic freedom, calculated by the Heritage Foundation and Democracy Index. It is noted that this index indicator was calculated by the experts from the World Bank using the index of voice and accountability. In the paper, the authors used the multinational panel dataset for 11 countries of the EU for the purpose of checking the correlation between economic freedom, democracy and macroeconomic stability. It should be highlighted that the abovementioned 11 countries are related by the fluctuation of economic growth during the transformation process (1996–2016) from communist party to the democracy and political pluralism. In addition, the authors proposed to add the indicators of political stability and trade openness, which allowed to take into account implementation of flexible macroeconomic instruments, including monetary policy, which towards increasing the economic growth, employment and financial development of the countries. The findings are directed received using the regression equation with fixed and random effects showed the high level of correspondence of the model used with the original observations. Despite the chosen approach to estimate the macroeconomic stability, the findings showed that there is a positive and statistically significant impact of economic freedom and democracy on macroeconomic stability.
- Keywords
-
JEL Classification (Paper profile tab)C33, Е37, E61
-
References47
-
Tables6
-
Figures3
-
- Figure 1. The ratio of the democracy level and GDP per capita in countries with the EFW index
- Figure 2. Dynamics of the Index of Economic Freedom (IEF it), 1995-2016
- Figure 3. The ratio of the Index of Economic Freedom (IEF ) to Democracy Index (DEM), 2013–2017
-
- Table 1. Correlation analysis of the GDP fluctuations in the chosen countries during the period 1990–2016
- Table 2. Correlation between IEF and EFW in the chosen countries during the period 1996–2017
- Table 3. The descriptive statistics of the main dependent and explanatory variables of the regression equation
- Table 4. Results of panel unit root test
- Table 5. Regression model with the fixed effect model FE and random effect model: panel estimation
- Table 6. The Hausman test for fixed effect model and random effect model
-
- Abeyasinghe, R. (2004). Democracy, political stability, and developing country growth: Theory and evidence.
- Baltagi, B. (2005). Econometric Analysis of Panel Data (3rd ed.). Chichester: John Wiley Sons, Ltd.
- Banaian, K., & Luksetich, W. A. (2001). Central bank independence, economic freedom, and inflation rates. Economic Inquiry, 39(1), 149-161.
- Bell, A., & Jones, K. (2015). Explaining fixed effects: Random effects modeling of time-series cross-sectional and panel data. Political Science Research and Methods, 3(1), 133-153.
- Bhowmik, D. (2018). Financial Crises and Nexus Between Economic Growth and Foreign Direct Investment. Financial Markets, Institutions and Risks, 2(1), 58-74.
- Clark, T. S., & Linzer, D. A. (2015). Should I use fixed or random effects? Political Science Research and Methods, 3(2), 399-408.
- de Barros Lisboa, M., & Latif, Z. A. (2014). Brazil: Democracy and growth. In Democracy works, Сonference paper.
- De Haan, J., & Sturm, J. E. (2000). On the relationship between economic freedom and economic growth. European Journal of Political Economy, 16(2), 215-241.
- Doucouliagos, H., & Ulubaşoğlu, M. A. (2008). Democracy and economic growth: a meta-analysis. American Journal of Political Science, 52(1), 61-83.
- Dutt, P., & Mobarak, A. M. (2016). Democracy and policy stability. International Review of Economics & Finance, 42, 499-517.
- Fenira, M. (2014). Democracy: A determinant factor in reducing inflation. International Journal of Economics and Financial Issues, 4(2), 363.
- Freedom House (2000). Annual survey of freedom country scores, 1972-73 to 1999-00.
- Greene, W. H. (2003). Econometric analysis. Pearson Education India, Delhi.
- Gwartney, J., Lawson, R., & Hall, J. (2017). Economic freedom of the world 2017 annual report. The Fraser Institute.
- Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. The Econometrics Journal, 3(2), 148-161.
- Hall, J. C., & Lawson, R. A. (2014). Economic freedom of the world: An accounting of the literature. Contemporary Economic Policy, 32(1), 1-19.
- Harold, N. Ng. Yan (2018). Econometric analysis of long and short-run effects of exports on economic growth in Cameroon (1980–2016). Financial Markets, Institutions and Risks, 2(1), 50-57.
- Heritage Foundation (2017). Index of Economic Freedom: Promoting Economic Opportunity and Prosperity. The Heritage Foundation and the Wall Street Journal, Washington DC.
- Iqbal, N., & Nawaz, S. (2010). Fiscal decentralization and macroeconomic stability: Theory and evidence from Pakistan.
- Justesen, M. K. (2008). The effect of economic freedom on growth revisited: New evidence on causality from a panel of countries 1970–1999. European Journal of Political Economy, 24(3), 642-660.
- Kasyanenko, V. O., Vasylieva, T. A. (2013). Integral assessment of innovation potential of Ukraine’s national economy: A scientific methodical approach and practical calculations. Actual Problems of Economics, 6(144), 50-59.
- Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The worldwide governance indicators: methodology and analytical issues. Hague Journal on the Rule of Law, 3(2), 220-246.
- Kilic, C., Arica, F. (2014). Economic Freedom, Inflation Rate and Their Impact on Economic Growth: A Panel Data Analysis. Romanian Journal of Economic Forecasting, 17(1), 160-176.
- Klein, N. (2007). Democracy born in chains: South Africa’s constricted freedom. The shock doctrine: The rise of disaster capitalism, 194-217.
- Kolodko, G. W. (1993). Stabilization, recession and growth in a postsocialist economy. MOCT-MOST: Economic Policy in Transitional Economies, 3(1), 3-38.
- Krugman, P. (2008). The Return of Depression Economics and the Crisis of 2008. W.W. Norton, New York.
- Kyrychenko, K., Lyulyov, O., Vasylieva, T., & Leonov, S. (2018). Macroeconomic stability and its impact on the economic growth of the country. Montenegrin Journal of Economics, 14(1), 159-170.
- Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of econometrics, 108(1), 1-24.
- Lunyakov, O. V., Vasilyeva, T. A., & Leonov, S. V. (2013). Analysis of internal and external imbalances in the financial sector of Ukraine’s economy. Actual Problems of Economics, 12(150), 176-184.
- Martinez-Vazquez, J., & Macnab, R. M. (2006). Fiscal Decentralization, Macrostability and Growth, Hacienda Pública Española. Revista de Economía Pública, 179(4), 25-49.
- Melnyk, L., Sineviciene, L., Lyulyov, O., Pimonenko, T., & Dehtyarova, I. (2018). Fiscal decentralization and macroeconomic stability: The experience of Ukraine’s economy. Problems and Perspectives in Management, 16(1), 105-114.
- Mobarak, A. M. (2005). Democracy, volatility, and economic development. Review of Economics and Statistics, 87(2), 348-361.
- Nguedie, Y. H. N. (2018). Corruption, Investment and Economic Growth in Developing Countries: A Panel Smooth Transition Regression Approach. SocioEconomic Challenges, 2(1), 63-68.
- Okonkwo, O. N., & Godslove, E. K. (2015). Fiscal Decentralization and Nigerian Macroeconomic Performance and Economic Stability. International Journal of Economics and Finance, 7(2), 113-121.
- Pilia Giulia (2017). Estonia and Lithuania in transition: A compared analysis of the change and its costs and benefits. Business Ethics and Leadership, 1(2), 78-95.
- Prince, T. (2017). Behavioral Finance and the Business Cycle. Business Ethics and Leadership, 1(4), 28-48.
- Rajan, R. G., & Zingales, L. (2003). The great reversals: the politics of financial development in the twentieth century. Journal of financial economics, 69(1), 5-50.
- Raphael, Louis H. E. (2018). A new economic order for global prosperity. SocioEconomic Challenges, 1(2), 52-58.
- Schimmelfennig, F., & Scholtz, H. (2008). EU democracy promotion in the European neighbourhood: political conditionality, economic development and transnational exchange. European Union Politics, 9(2), 187-215.
- Smith, A., Soares, S. M. (Ed.) (2007). An Inquiry into the Nature and Causes of the Wealth of Nations. MetaLibiri Digital Library.
- Stiglitz, J. E. (2009). The anatomy of a murder: Who killed America’s economy? Critical Review, 21(2-3), 329-339.
- Subramanian, M. A., & Satyanath, M. S. (2004). What determines long-run macroeconomic stability? Democratic institutions (No. 4-215). International Monetary Fund.
- Unit, E. I. (2017). The Economist Intelligence Unit’s Democracy Index.
- Vasylieva, T. A., Lyulyov, O. V., Leonov, S. V. (2018). Macroeconomic stability evaluation in countries of lower-middle-income economies. Bulletin of the National Mining University, 1, 138-146.
- WGI (2017). The Worldwide Governance Indicators.
- World Bank (2017). World Development Indicators 2017.
- Zaman, C., & Drcelic, B. (2009). Macro-Stabilisation Issues in the Serbian Economy: Methodological Evaluation.