Economic freedom and democracy: determinant factors in increasing macroeconomic stability

  • Released On
    Thursday, 07 June 2018
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  • DOI
    http://dx.doi.org/10.21511/ppm.16(2).2018.26
  • Article Info
    Volume 16 2018, Issue #2, pp. 279-290
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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.

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    • 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